For almost a decade, the brokers who specialize in selling apartments were blessed in the commercial real estate world. Huge volume. Great prices. Big commissions. A seemingly endless stream of deals.
Now, they’re sidelined because of the coronavirus pandemic.
New listings have been pulled. Potential buyers are spooked. The economic shutdown puts everything in doubt.
“Nobody has any idea what’s going on,” said Cushman & Wakefield broker Pete Shelton of Seattle. “If they say they do, they’re lying.”
Apartments have been the golden child of commercial real estate since 2010. Rents have soared, and vacancies have plummeted. Investors who wouldn’t have touched rentals with a barge pole in the past economic cycle flocked to get in on the action.
OVID-19, of course, has changed all that. The loss of more than a staggering 30 million jobs, in a matter of weeks, has thrown apartment rent rolls into uncertainty and caused apartment landlords to dread upcoming rent due dates. Predictions are that loan failures in commercial real estate will be led by apartment mortgages starved of cash flow.
Apartment development projects have mostly been stopped in their tracks, either by edicts from state and local governments or from lenders who have hit pause until the economy loosens up. For apartment sales pros, the sudden slowing of a market that had kept them busy, hiring new talent and selling at record levels, has been dramatic.
CoStar News checked in with brokers in five of the country’s busiest sales markets and most important rental areas. Boston, New York, Washington, D.C., Denver and Seattle have all been happy hunting grounds for investors and developers in the past few years. Now, strategies and day-to-day routines have changed.
Boston: Shoring Up Relationships
In Boston, a booming economy fueled by technology and pharmaceutical companies had set off an apartment building and sales rush. In the past 12 months, about 290 apartment properties traded hands in greater Boston, totaling about $3 billion, according to CoStar data.
Now?
“Ninety percent of the investment sales world is frozen, it’s on hold,” said Travis D’Amato, a managing director at Boston’s Walker & Dunlop office. “But it’s a pause button, not a stop button. It’s not like deals are being pulled or going away. They’re just being put on hold.”
Boston has a nearly universal construction shutdown. There were more than 120 apartment developments underway in the metropolitan area when Boston and several neighboring cities halted all work. The market was already stretching the ability of contractors to keep up, and the new delays because of the coronavirus means some of these projects will likely not restart.
But if D’Amato’s usual work had dried up, he and other brokers are making the best of it. Part of that is shoring up relationships with big owners, so connections will be strong if normal ever returns.
“I’ve had more face time with clients via Zoom this past month than I’ve had in years,” D’Amato said.
He and his team are exploring new technologies and new ways to make pitches to potential buyers down the line.
“Our goal is to use this time to get better,” he said.
New York: Underwriting, Valuations
New York, the largest U.S. city, is known as one of the tightest, most expensive rental markets in the world. It’s been prized by investors who scooped up an average of $10 billion in properties each of the past few years. Now that volume is set to decline sharply.
Avison Young broker James Nelson compares what the market’s apartment sector is facing to the low point of the last recession: “I think the rest of the year looks like 2009,” he said. “The only sales will be must-sells.”
New York had 60,000 new apartments underway when the outbreak struck, and a 2.4% vacancy rate, well below the national average of 6.7%, CoStar data shows. Nelson and others worry New York may not see all its jobs, especially in the service industry, come back. That will play havoc with apartment fundamentals.
“You’re going to be hard-pressed to make a case there’s going to be any rent growth,” Nelson said. “What’s job growth going to look like? The question for multifamily is can we even get back to semi-normal?”
Underwriting and property valuation are now as important to Avison’s clients as turning them on to available apartment properties.
“Investors are saying, ‘I want to buy, but I want a discount,'” he said. “What’s that going to be? Twenty percent? Thirty percent? And who’s the first owner who’s going to take that hit?”
Washington: Market Cheerleaders
Bill Roohan has been selling apartment properties for CBRE in the mid-Atlantic since 1984. He and his teams have brokered more than $44 billion in sales over the years and, now a vice chairman, he’s seen a few recessions.
Greater Washington, D.C., has always been a strong rental market with its steady government employment sector and inflow of fresh-from-college workers moving to the District and the Virginia and Maryland suburbs.
So, while deals have all but dried up for now, Roohan and his team see part of their job is to be cheerleaders for the market. They’re reminding investors and owners that the federal government will probably be spending a lot of money in the area when reopening starts in earnest.
“D.C. is the best market to be in in a contraction,” he said. “I think we’re going to come out of this quicker than most people think.”
Washington has clocked a steady $2 billion or so in apartment sales per quarter during the past two years, according to CoStar data. And while nationally many prognosticators worried that a decade of growth in the apartment sector must necessarily be coming to an end even before the virus outbreak, Washington was seeing exceptional growth. The announcement that Amazon would develop a second headquarters next door in Arlington, Virginia, and that Virginia Tech, too, would expand there, set off a new round of sales of apartments nearby.
And Roohan doesn’t believe economic cycles have set time spans.
“I’m just not of the school that thinks the world is ending,” he said. “You don’t look at a calendar and say, hey, it’s been a decade we need a recession. I don’t believe it.”
Denver: Search for New Buyers
The Mile High City has become a darling of investors in the past 10 years, as it has become a darling for young workers and tech companies. Denver’s diverse economy — big government employment, solid financial and banking sector and a growing tech and creative economy — has helped drive demand for rentals.
Once considered a secondary market, Denver has seen sales of apartments leap from $1 billion a year in 2015 to over $5 billion in 2019, according to CoStar. And local investors have been joined by big institutional players and international buyers.
“We think we’re going to come out of this better than other asset classes,” said Craig Stack, an apartment broker for Colliers International in Denver. “Denver’s economy is pretty well diversified, and we should see a strong resurgence in hiring.”
And while a slowdown in listings is seen by brokers across the country as a chance to improve ties with regular clients, Stack said now is the time to seek out new relationships. Investors who are willing to take on more risk have historically been the first buyers after a recession or a crash.
“We’re seeing a number of groups — not grave dancers — but groups who see this time as an opportunity,” he said. “They think instead of competing against 20 other people for a property they’ll be competing with five. We’re getting calls from family offices, institutional groups that are not publicly traded.”
CoStar research suggests demand was strong for apartment properties in Denver just before the outbreak.
“Investment activity picked up considerably in the final quarter of 2019. More than $1.6 billion worth of assets traded, a high mark for the year,” according to CoStar’s most recent Denver apartment report. “As has been the case in recent years, new construction stole the headlines. In December, Washington-based Global Asset Capital acquired the 386-unit Luxe at Mile High from Embrey Partners for $145 million, or $374,677 per unit. The asset wraps up construction in early 2020.”
Seattle: Advising and Coaching
Like San Francisco, Seattle’s role as a tech hub has colored its apartment market. High-end, downtown properties aimed at young, well-paid renters are all the rage.
From 2016 to 2019, Seattle led the nation in the percentage of new apartments under development, according to CoStar, rivaling crane-crowded Los Angeles. Even now, there are 105 projects underway, looking to add 20,000 new units to the metropolitan area, 6% of the total inventory.
Those have been big targets for investors who want to get in on the rental market. The 2-year-old Danforth, a 265-unit, 16-story tower in Seattle’s Capitol Hill neighborhood, sold to New York’s Vanbarton Group for $210 million, or almost $800,000 per unit in December, for example.
Brokers say listings are now on hold, but investors are still calling.
“Our only thing is to try to be as optimistic as we can,” said Cushman & Wakefield’s Shelton. “People are looking for information.”
Because tech is king in Seattle, and because tech is one industry doing well in the pandemic, there is confidence the apartment market will hold up well.
But with little to actually sell, Shelton and other sales brokers are now advisers and coaches.
“I’m trying to be as helpful as I can,” said Shelton. “If you have some encouraging news to share, you share it.”
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