Wall Street Journal Write-up - September 30, 2009 (downloadable)

Wednesday, September 30, 2009 ~ VOL. CCLIV No. 77

DEAL OF THE WEEK SEPTEMBER 30, 2009

Apartment Know-How in NoHo? By MAURA WEBBER SADOVI About two years ago, the owner of the Gallery at NoHo Commons was close to selling the apartment complex in the North Hollywood section of Los Angeles for more than $140 million, a person familiar with the matter said. Now, the 438-unit complex has sold for $96 million. The deal is a sign of the drop in values in the multifamily sector which has seen vacancy rates rise as costconscious renters have doubled-up or moved in with family members. Sales of apartment complexes nationwide have slowed to a trickle. Some $27 billion in apartment buildings traded in 2008 compared with $55 billion in 2007, according to Reis Inc., a New York real-estate research firm, based on a survey of transactions valued at $2 million or greater. Through the second quarter of this year, there has been less than $5 billion in deals. But some investors have stayed behind as others have fled the sector and the sale of NoHo Commons gives a glimpse into their thinking. It was purchased by a nontraded real-estate investment trust managed by Behringer Harvard, a Dallas real-estate company. Behringer has become one of the biggest buyers of U.S. multifamily properties this year, buying five apartment complexes with 1,690 units for a total of about $274 million in cash and assumed debt. Behringer executives say they see opportunity in the downdraft, which has sent U.S. apartment prices from $113,000 in the third quarter of 2008, to $80,000 in the second quarter, Reis says. "Properties of a very high quality are available at pricing that really wasn't available a few years ago," says Jason Mattox, chief administrative officer at Behringer. Behringer Harvard was formed in 2001 by Robert Behringer, 61 years old, who worked for a large pensionfund adviser before he started two real-estate companies that became predecessors to Behringer. Behringer now has about $8 billion in assets under management through its various nontraded REITs as well as through some private partnerships and other affiliates, according to Robert Aisner, president and co-chief operating officer of Behringer Harvard. The portfolio hasn't been immune to the downturn. For example, a Dallas condominium development by a Behringer-affiliated partnership converted the condo units to rentals about six months ago after they failed to sell quickly, Mr. Aisner says. Behringer is able to go on a buying spree partly because it has been able to raise capital. Through early September, Behringer Harvard Multifamily REIT has raised about $249.2 million from a public offering begun in September 2008. It also has raised money in a private offering as well as about $200 million from Dutch pension fund PGGM. It also is taking advantage of financing still available for

apartment acquisitions from Freddie Mac and Fannie Mae. Mr. Aisner says Behringer seeks to finance as much as 60% of the cost of its acquisitions, and will likely look to one of the housing-finance giants for a mortgage on the NoHo Commons complex for which it originally paid cash. Apartment buildings are clearly producing higher returns than they used to. In 2007, the so-called capitalization rates of apartment buildings, derived by dividing a building's net operating income by the price paid, were 5.8%. Today they have risen to 7.1%, according to Real Capital Analytics, a New York real-estate research firm. The NoHo apartment complex, which offers such amenities as a pool, fitness center and a room that it bills as a recording studio, fetches monthly rents in the $2,400 range for a two-bedroom unit and has an occupancy rate of 91%. The apartment property was attractive because if it is financed it could ultimately throw off a rate of return of more than 8%, says Herb Chase, managing director of Multi Housing Capital Advisors who represented the seller in the Los Angeles complex sale. Opportunities for such higher returns in apartments have begun to attract some investors who previously retreated to other perceived safer investments such as Treasury bonds after the recession hit. "Everybody was scared but people are less scared now," Mr. Chase says. To be sure, the outlook for apartment properties is likely to get worse before it gets better. U.S. apartment vacancies are expected to peak next year at 8.1%, a 30year high, according to Reis. It could sour further if the economy worsens and rents and occupancy rates continue to fall. But some people think a recovery for apartments is likely in 2011. If the job market stabilizes in 2010, younger workers are likely to be the first to be hired back because they are cheaper to employ, the theory goes. Since many of those people are renters, that is going to drive the apartment recovery, says Victor Calanog, director of research for Reis.