Transwestern Institutional Multifamily Group's Cissel and Melnick

There’s no question the investment sales market has been particularly stagnant over the past several months. Between the lack of financing in the market, the stalemate over pricing between buyers and sellers and the hype about the distressed market, transaction volume has been slow, at best.

Yet, in certain markets and product types, brokers are closing deals on an increasingly steady basis. Transwestern Institutional Multifamily Group in the Mid-Atlantic, led by managing principals Al Cissel and Scott Melnick, completed four transactions in the past week alone, and has more under contract. Cissel and Melnick say that buyers have become more comfortable with current conditions and, in many cases, are being lured off the sidelines with what they believe are fair deals.

The pair recently spoke with GlobeSt.com about the latest transaction activity, their view of the market and some encouraging reasons for optimism for the coming months. An edited version of that discussion follows.

Globest.com: With a few recent transactions, you folks have been pretty busy lately, at least compared to this time last year. What’s that about?

Scott Melnick: We closed four deals last week and went under contract for four others, whereas we probably had no closings in September 2008, so there is life in the market. With some of the most recent deals, we had more than 30 offers and 10 really strong buyers that leapt out, near the asking price. In the beginning of the year, because the world was in flux, the transactions tended to be smaller deals geared to private buyers. They’re still in the market, but gradually, over the course of the year, rather than being below $40 million, the deals are getting bigger. There are now buyers out there that have seen the opportunities and have come up with equity capital, or are ready to spend their own money; in some cases, they think bigger is better and are doing $70-million to $90-million deals, even portfolio deals. Earlier in the year, there would have been nobody there to buy.

Al Cissel: We’ve been very active over the past 90 to 120 days. Last week was the first time we saw a lot of the institutions showing back up again. They were really out of the market 30 to 45 days ago. Now they say they’re comfortable with the market and with the returns, they like the debt terms, if they’re using it–so they’re coming back into the market and have quite a bit of motivation. Their confidence level is up and they feel comfortable with where pricing and returns are now. We’re encouraged to see the active institutions right now.

Globest.com: So could you compare your quarterly or yearly deal activity?

Melnick: In 2008, our group, which covers from Raleigh, NC to Baltimore and north, had slightly over $1 billion in sales, which was more than any other regional multifamily brokerage group in the country in the industry. That’s good news, but that also means that when everything stopped on a dime last September, you had more deals not close than anyone in the country. So last September, we literally had zero closings. And this September, we had 6 closings.

Cissel: We expect to rack up $300 million to $500 million by the end of this year, most of which closing in the second half. Last year, we had the bulk of our work and business done by midyear.

Globest.com: Is this what’s going on regionally? Would you say the same is occurring in a lot of other major markets in the country?

Melnick: In the Mid-Atlantic area, there are more buyers than there is available product for multifamily. Admittedly, it is one of the most stable markets in the country. One of the reasons a lot of investors are coming here is that there’s job growth due to the federal government, and the highest absorption levels on record in terms of apartment leasing last year. There’s also more investors nationally for multifamily, but the combination of good, available debt rates and the stability of this region have made it so there are more buyers here than elsewhere in the country. And in general, 90% of the buyers that have been aggressive now would not have been that way four months ago.

It took time for people to get comfortable with what’s going on, and come up with ways to raise money or get their investment committees to agree to acquire assets. But properties are still trading today at below replacement cost, and that’s attractive in regions such as this.

Globest.com: You said institutions have been more active–how much? Has it been pretty significant?

Cissel: A lot of institutions were active as equity sponsors. Now they’ve come off the sidelines and are definitely back in the game, looking for acquisitions. It went from zero to full speed ahead quickly.

Melnick: The top 10 bidders on a recent transaction we just handled were pretty much evenly split–we had a couple of REITs, a couple of public pension fund advisors–those groups would not have even been submitting offers, let alone be in the top 10, four months ago. It has come back full swing, but there’s still a lot of the institutional money indirectly on the sidelines, waiting to see some of the data points.

In addition, in talking to several of these institutional players, if they weren’t in the market 45 days ago but they were tracking it to see where cap rates and pricing was, they’re not only in the market now but most of them have moved their cap rates downward to be more competitive.

The market’s looking better for them. But the one change is that while there are a lot of private and institutional buyers in the market, and more buyers in general than available product, generally everyone is looking at putting on some form of debt. Be it Fannie Mae or Freddie Mac, there are still fewer all-cash buyers. Even the people who may have $1 billion in cash, the models have changed a bit.

Globest.com: What’s your typical deal like today? Is it different than, say, a year ago?

Cissel: The only change that’s occurred is that buyers are being a little more specific. So someone may have parameters where they’re looking for a B-plus property in an A location, and if it doesn’t fit that mold, they’re not going after it. There are others that want the brand-new, beautiful properties that are fully leased. Then there are others that need an opportunity to do something to fix up the property, such as a broken condo deal. The one general scenario is that over the past few years, the majority of buyers wanted value-add deals, but today, the reason you’re seeing the 10 top buyers all closer in price is partially because there are more buyers out there, but also because they’re all looking at it the same way. They’re making offers based on current income, rather than possible future income. But there’s a buyer for each product type, from C-class properties to high end.

People are also taking the opportunity in this market to move up a level. If someone was focused on C product, now they’re trying to buy B, and the B buyers are trying to go for class A product. The institutional buyers are trying to go for the newer, nicest product, and that’s where we’re seeing an imbalance in the market right now.

Globest.com: There’s been a lot of talk in the general market about distress–how much interest is there among buyers for a distressed multifamily asset, or are there even many opportunities out there?

Cissel: We’re not seeing that many truly distressed assets right now. There will be some coming, especially the assets where there will be debt due in a couple of years. But in terms of bank-owned distressed properties, there aren’t as many out there as people thought there would be. For a while, I think a lot of people were waiting for the distressed opportunities to come to the market, but a lot of those buyers now have come to the conclusion that there’s now good real estate out there at fair pricing, there’s very good debt available and they’re ready to get back in instead of waiting for the unbelievable opportunity that may not show up. We’ve been talking with some lenders and others in the market and yes, there are a few assets in trouble, but I don’t think it’s going to be the amount that they thought. A lot of the lenders are also willing to work deals out with the borrowers right now. They don’t seem to want to take these assets back. There are a lot of extensions and modifications being done, so the distressed situations are being worked out with the current owners.

Melnick:And in the beginning of the year, there were some buyers that weren’t being aggressive in this region because they were thinking they could get 10-caps in Phoenix or someplace. Even those markets are showing that there may be some distressed sales, but not at cap rates that people were hoping for. It also makes them focus more on the opportunities that are out there. If you look through the closings we’ve had and that will be closed through the end of the year, they are generally from strong sellers that have owned properties for a while and have reasons why they can sell at today’s market pricing and still benefit, and some of it may be strategic–they want to exit one product type or a market–but it’s really the strong sellers, be it REITs or life companies, etc. and buyers right now don’t want to go on a wild goose chase, they don’t want to work on properties where the seller may not be in control. That also goes to why you’re also not seeing bidders on the sidelines anymore. People are focused on the opportunities that are there in front of them, because “what may be” hasn’t materialized.