Analysis of Multi-Family Commercial Real Estate in Maricopa County January & February 2013

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1 Analysis of Multi-Family Commercial Real Estate in Maricopa County January & February 2013 By: Paul Dionne Director of Analytics Executive Summary The most robust asset class in terms of both dollar volume transacted and number of properties sold in the Greater Phoenix Area for the last several months has been multi-family residential property. In this analysis, we utilize Vizzda s state-of-the-art commercial real estate research platform to derive valuable information on this sector as it stands in March 2013, in the context of the recent increase in multi-family acquisition and disposition and in comparison to the first quarter of We analyze our findings as they relate to and are influenced by economic factors including a case study of the largest microeconomic factor driving transaction volume, Equity Residential s $16b acquisition of Archstone Enterprises. We then shift to a discussion of the sources and magnitude of new debt financing in the multi-family sector and conclude with information on transactions and distress for land slated for multi-family development. Copyright 2013 VIZZDA All Rights Reserved.

2 Market Overview Through the first two months of 2013, thirty-three multi-family assets totaling 4,579 units have changed hands for a total sales volume of $427,659,161. These top line figures represent a 114.9% improvement in transaction volume and a 41% increase in total units sold when measured against the first quarter of Additionally, the quality of assets being transacted is improving, as reflected in an increase in the average year of completion (decrease in average effective age) from to over that same period. As you can see from Figure 1 below, there is considerable differentiation in the average price per unit depending on the location of the property, as well as a heavy concentration of recent sales in the East Valley. Fig. 1 Current per unit prices for these cities reflect recent gains in transaction volume and number of units sold which accelerated in the fourth quarter of 2012 and rebounded significantly in February after a seasonal lull in January. This pattern is evidenced by figures 2 & 3 below, which have unit turnover near its December 2012 peak and both sales volume and average price per unit significantly outpacing the high water mark set in late When these three metrics improve in conjunction it further reinforces the increase in both the quantity and quality of multi-family housing assets being transacted. Figure 3 also demonstrates the strong pro-cyclicality in sales volume vis a vis unit prices (i.e. an increase in per unit price correlates to but does not cause an increase in sales volume, and vice versa). 1

3 Economic Factors Broadly speaking, this upswing in activity is attributable to macro-economic factors. Scarcity of mortgage capital, especially for first-time buyers, precludes home-ownership for a large portion of the population, despite low cost of funds and excess supply in the single-family residential (SFR) pipeline. When this group is combined with those who either willingly downsized from SFR, strategically defaulted on their home loan or were foreclosed upon, the number of potential consumers of multi-family housing has increased significantly as a portion of all housing consumers. A dearth of new construction in the sector following the financial crises of 2008 has also contributed to a constrained development pipeline and increased demand for both recently completed projects and entitled land among investors. Fig. 2 Fig. 3 In addition to these macro-economic factors, specific one-off and micro-economic factors contribute to the magnitude and timing of the current increase in sales volume. Among these, the most impactful in the immediate term is the repositioning of a major multi-family-focused Real Estate Investment Trust into core markets and away from peripheral markets especially Phoenix. Also of significance is the recent trend towards coventures between equity sponsors in the commercial real estate space and major financial service companies for the purpose of acquiring multifamily assets. Finally, government agencies and non-traditional financial institution have stepped in to assume financing commitments for major projects, which has reduced the need for scarce bank financing. 2

4 Acquisition and Development Financing A total of $281,750,994 in new debt secured by multi-family assets was issued between January and February of The largest single source of financing for multi-family acquisition was CME and Portfolio lending originated by the capital markets-affiliates of major commercial real estate investors and assigned to Government Sponsored Enterprises (GSEs). Of the $ m in new so-called Agency Debt, $82.321m or 61.5% is attributable to a single underwriter, CBRE Capital Markets, on a single deal a portfolio sale between Equity Residential (EQR) and a co-venture between Goldman Sachs and Greystar, described below. Fig. 4 Traditional banks comprised slightly more than one third of overall financing activity, originating a total of $94,683,742 in new debt on eight multifamily properties. Bank of America leads traditional banks year to date with $65.36m in new debt, all of which facilitated acquisitions by Bascom Arizona Ventures and Fortress Investment Group. US Bank issued a total of $25.79m in new loans and Wells Fargo issued an additional $1.455m over this time period. Alternative sources including pension funds and insurance companies furnished an additional $41.246m in financing, the overwhelming majority of which came in two notes: $20.178m with TransAmerica Insurance Company and $19.5m with Donald Hendricks of Hendricks Berkadia. The remaining $12,478,250 in new acquisition financing was provided as seller carry. 3

5 Equity Residential Disposition A full 64.7% of transaction volume $276,877,311 in sales is attributable to a single seller, Equity Residential (EQR). On November 26 th, 2012, EQR announced that it had formed a joint venture with AvalonBay Communities to acquire Archstone Enterprises a major multi-family owner/operator for $16b from Lehman Brothers Holdings, Inc. Per documents filed with the SEC: [T]he Company has acquired directly or indirectly, 71 wholly-owned, stabilized properties consisting of 20,160 apartment units, two additional partially owned and unconsolidated stabilized properties consisting of 768 apartment units, three master-leased properties containing 853 apartment units, four projects in various stages of construction for 964 apartment units and fourteen land sites for the potential development of approximately 4,318 apartment units. The $9b acquisition cost attributable to Equity Residential under the terms of the joint venture was furnished through payment of $2.016b in cash, the issuance of 34,468,085 common shares of EQR to Lehman Brothers Holdings, Inc. and the assumption of 60% of Archstone s outstanding liability including $2.2b in agency multi-family debt with Fannie Mae. To finance this transaction, Equity Residential has sold or plans to sell eighty-two assets comprised of 23,209 units for a total of $3.574b. Equity Residential also paid down $2b in legacy mortgage debt, borrowed $1.6b against a $2.5b revolving credit facility and $750m against a delayed draw term loan. The following table details the properties sold by EQR in Maricopa County during the first two months of 2013: Property Name Buyer No. of Units Price Price per Unit The Sonoran GSG Residential 429 $50,966,034 $118, Country Brook Apts. Bascom/Citadel 396 $45,700,000 $115, Little Cottonwoods Bascom/Citadel 379 $42,788,000 $112,897 Las Colinas Frankel Family 304 $41,250,000 $135, Acacia Creek MIG Real Estate 304 $39,964,000 $131, Bella Vista GSG Residential 248 $30,104,290 $121, Sedona Ridge GSG Residential 250 $27,114,987 $108,459 Bellagio Holland Group 202 $25,750,000 $127, Co-Ventures and Portfolio Sales The acquisitions attributable to GSG Residential Portfolio, LLC 927 units in three properties totaling $108,185,311 were completed by a Goldman Sachs/Greystar co-venture formed in early 2013 to acquire a 27-property portfolio in two sales totaling $1.5b. The second phase of this transaction is scheduled to close March 21 st, 2013 and will include an additional three properties totaling 648 units in the Phoenix market. Another major acquirer from Equity Residential is Bascom Arizona Ventures with backing from the credit arm of Fortress Investment Group, a leading global investment manager. The Bascom/Fortress co-venture acquired 775 units in two properties for $88.588m for an average per unit price of $114, A third, unrelated portfolio sale took place during this period as Donald J Sherman sold 491 units in three properties to Jeffrey M Ctvrtlik of Inco Real Estate for $10.595m or $21, per unit. 4

6 Multi-Family Land Transactions As previously mentioned, there has been strong demand for entitled land planned for multi-family development. In the first two months of 2013, a total of acres of land planned for 1,361 multi-family units changed hands for a total of $16.12m or which represents a sale price of $5.50 per square foot or $11,844 per planned unit. See the map below for the location and planned unit count for planned multi-family developments recently acquired in Greater Phoenix: 5

7 Distress The following properties were noticed for trustee sale during this period: Windsor Palms Apartments Units: 146 Address: 2990 W Thunderbird Road Year Built: 1988 Total ft 2 : Auction Date: June 4 th, 2013 Outstanding Debt: $4.75m West Hill Apartments Units: 14 Address: 115 W Hill Drive Year Built: 1980 Total ft 2 : 12,408 Auction Date: May 20 th, 2013 Outstanding Debt: $350k Cactus Place Apartments Units: 48 Address: 2040 W Cactus Road Year Built: 1975 Total ft 2 : 40,320 Auction Date: May 15 th, 2013 Outstanding Debt: $2.528m Knight Apartments Units: 53 Address: 2302 E Pinchot Avenue Year Built: Total ft 2 : 43,602 Auction Date: April 16 th, 2013 Outstanding Debt: $1.825m Berkana on 12 th Street (land only) Size: 3.66 acres Location: South of the Southwest corner of 14 th Street & Bell Road Zoning: R-3A Planned for: 173 condo units Auction Date: April 25 th, 2013, 12:30 PM Outstanding Debt: $9.63m Vivendi Apartments (land only) Size: 1.70 acres Location: North of the Northwest corner of Hayden & Thomas Roads Zoning: C-O Planned for: 41-unit green apartment units Auction Date: April 17 th, 2013, 11 AM Outstanding Debt: $860 The following properties reverted to lenders at trustees auction during this period: La Prada Apartments Units: 20 Address: 829 N 4 th Avenue Year Built: 1954 Total ft 2 : 7,576 Foreclosing Beneficiary: Toma Partners Credit Bid: $532.5k Corte Linda Apartments Units: 119 Address: 1630 E Baseline Rd Year Built: 1986 Total ft 2 : 87,012 Foreclosing Beneficiary: Sir Mortgage Finance Credit Bid: $3m 6

8 Tramonto (land only) Size: acres Location: North of the Northeast corner of I-17 & Carefree Highway Zoning: R3-A Planned for: a maximum of 211 condos Foreclosing Beneficiary: Elliott Homes, Inc. Credit Bid: $650k West Main Station Village (land only) Size: 4.05 acres Location: West of the Northwest corner of Main Street & Alma School Zoning: R-4 Planned for: 55 condos Foreclosing Beneficiary: Envision Capital Management Credit Bid: $2m Conclusion The persistence of the factors relating to demand for multi-family housing discussed above, as well as a relatively sparse distress pipeline will enable multi-family assets to command a considerable premium to historic valuations despite downward pressure from the Equity Residential disposition. Competition for increasingly scarce multi-family properties increases the quality of product transacting as reflected in the rapidly decreasing effective age of properties changing hands and concurrent increases in both the monthly unit turnover and per unit price. Innovative financing including strategic partnerships between commercial real estate development and financial service companies and Agency Debt as a major source of funds, not to mention historically low costs of funds push transaction volume and per unit price above their December 2012 highs and facilitate the transfer of over 4,500 multi-family units year to date. Vizzda s comprehensive market coverage allows for powerful insight into economic fundamentals driving various asset classes within commercial real estate. Our state-of-the-art research platform and analytics enable intelligent decision-making for commercial real estate professionals in real time. For information or clarification regarding this or any Vizzda Analytic Report, please contact Paul Dionne at (480) or pdionne@vizzda.com. For information on Vizzda or to subscribe to our premium service, please contact Kris Thompson at (480) or kthompson@vizzda.com. 7