The apartment industry has never been more exciting than it is right now. Competition is fierce because rental rates are rising, buildings have historically high occupancy and new developments are filling up faster than ever. The strength of the market is forcing investors and developers alike to seek ways to differentiate themselves from the herd. One way to stand out is to pursue pre-stabilized transactions.
Historically, developers built assets with the intention of holding on to them for decades, selling only when the property was no longer usable or efficient to operate. It takes time to alter traditional modes of operation since we are all creatures of habit. The philosophy of holding properties forever changed in the mid ’90s when an active secondary marketplace started gobbling up assets. From 1985 until now, the average hold period has diminished from 27 years to four years as real estate operating companies have bought, created value and sold to maximize value. With older properties becoming functionally obsolete and more difficult to manage, many investors are focused on purchasing new properties.
Now we’re seeing more and more transactions taking place before a newly constructed property is completely full, which is a trend we did not experience during the great recession. It’s a relatively new phenomenon. Investors and developers have realized there’s not enough supply to satisfy demand. With a multitude of buyers chasing every property, it’s essential to buy the property before someone else can get their hands on it. Purchasing a property before it becomes full has become a win-win situation for everyone involved: The investor gets to purchase a brand new property at a discounted price and gains control of leasing up the property with his own quality tenants. For their part, developers get to “take their chips off the table” and go do what they do best: roll the capital from the sale and build another property.
I have brokered this structure in numerous instances — whether closing happens at certificate of occupancy or within an agreed-upon occupancy rate.
Two years ago, a majority of lenders felt it was too risky to lend on presale opportunities. Since both the buyer and seller were experiencing success, a market was born. At first, only life insurance companies and bridge lenders were willing to take part. But now, Freddie Mac is actively participating with an attractive program. Developers who are in control of their capital stack are more likely to pursue a pre-stabilized transaction because they are nimble and flexible, and can make the decision without asking their partner for permission. Those developers with institutional limited partners must grapple with a litany of hurdles, not to mention investment committees and decision makers who must endorse the deal. With increased delivery of core product in primary markets, I anticipate institutional sellers will become more agile and willing to sell earlier because of record sales, rents, occupancy and an onslaught of future competition.
Ironman, barbecue champion and deal enthusiast, Will is also the Atlanta-based leader of the Southeast Multifamily Advisory Group of Colliers International. Will brings several years’ experience in the industry, primarily focusing on multifamily investment services and capital markets.