Where’s the Inventory?

By Gabe Johansen, Apartment Broker SMI Commercial Real Estate, LLC

As the economy slowly improves and banks get back in the business of lending there has been a steady increase of incoming phone calls being directed to my office and it’s not the institutional investors who have composed the buying majority of multifamily transactions throughout the recession who are calling.  Rather, it is the smaller investors who have been sitting on the sidelines for a while who are once again interested in getting in the game.  This is great news for many reasons, but it does pose one fairly large challenge… in today’s market finding that perfect apartment acquisition may prove to be more difficult than it sounds.

Do you remember the famous Wendy’s hamburger commercial from the 1980’s that, for what seemed like the whole decade, kept asking us where the beef was?  Almost thirty years later the question on many of our industry’s minds is… where’s the inventory?  A quick search on LoopNet, CoStar, MLS or any other property search engine will paint you a picture of a pretty sparse shelf.  Most investors and apartment brokers are currently abuzz about how few apartment projects are listed for sale.  Where there was once several pages of listings in many of the major markets in Oregon, now you will find one page or two at most in some cases.

Contrary to the supply, demand for multifamily real estate is very high. Cap rates continue to compress and several Oregon markets are seeing multifamily properties reaching pre-crash level rates.  Most apartment projects have already recaptured a large percentage of the value that was lost during the Great Recession.  So if demand is high, cap rates are low and values are approaching pre-crash levels… why don’t more apartment owners want to sell?

The apartment market is currently the undisputed champ of the investment world.  Vacancy is very low in most Oregon markets and rents are on the rise creating a healthy return for landlords.  Another factor to consider is lending.  Last year the Commercial MBS market doubled and apartment lending interest rates have remained very close to their historic lows.  Many apartment owners have opted to refinance their properties to take advantage of these low rates and further increase their cash flows.

This leaves many multifamily property owners asking this question… “If I already own the best investment available to me in the marketplace today, what would I replace it with if I sold?”  Many investors would love to increase their unit count or move their investment dollars to a different area for various reasons.  As landlords contemplate selling they also understand  that unless they are able to identify an exchange property and complete a successful 1031 tax-deferred exchange, Uncle Sam is going to expect a sizeable check come tax time.

With inventory being as low as it is, a lot of investors have decided it is safer to hold on to what they have rather than risk footing a large tax bill.  Chasing a bigger or better opportunity just isn’t worth the risk for some and without a larger selection of available inventory it is just too hard for them to get a good comfort level around selecting a potential exchange property.

There are however, owners out there who are interested in cashing out and moving away from the multifamily market entirely or becoming the bank by offering seller financing.  These are the individuals who will ultimately begin filling up the shelves again and taking advantage of a seller’s market.  If that happens to be you, grab a hamburger and call your apartment broker today.