[IMGCAP(1)]NEW YORK CITY-Following on the heals of Archstone-Smith Trust's recent closing on the acquisition by a partnership by Tishman Speyer Real Estate Venture VII L.P. and Lehman Brothers Holdings Inc., multifamily insiders and REIT analysts say there could be more deals this size to come. Insiders note that although it seems potential multifamily borrowers are sitting on the sidelines for now, some say the market is so unpredictable, nothing should be ruled out.
[IMGCAP(2)]While such deals are still a good bet, not for the near-term, and Richard Anderson, a REIT analyst at BMO Capital Markets, tells GlobeSt.com not to expect to see a hand-shake of this size for a while. “There is too much uncertainty in the market right now for this type of large scale activity,” he says. “When things settle down, potential multifamily borrowers will start thinking about making deals this size, but I project they will be in pause mode well into 2008.”
The $22 billion transaction he is referring to was “all about timing,” he noted. It is the largest public-to-private M&A transaction in the multifamily REIT sector as of yet and “buyers had to really go to the earth to get it done.”
Anthony Paolone, an analyst with JP Morgan Securities, agrees with Anderson and explains that it doesn't seem likely that a deal this size would happen again in the near future, however things could change. “All indications are that the debt availability is a lot harder to get,” he says, which is causing a shift in valuation. “In multifamily as well as other property types, the pace of deals has slowed.”
Steven Marks, an analyst at Fitch Ratings, explains that the multifamily sector has demonstrated strong fundamentals over the past two-and-a-half years, as measured by same unit net operating income growth. “The potential for future strong operating performance, combined with weaker stock prices that may not fully price in continued growth, make multifamily REITs more attractive acquisition targets than REITs in other property sectors,” he notes. The ability for an acquirer to buy a high quality portfolio of assets in one large transaction, Marks explains, instead of trying to aggregate a portfolio piecemeal, was one of the attractive attributes of the Archstone-Smith Trust deal. “Many REITs have this attribute and it is what makes so many of them potential acquisition targets.”
Louis Taylor, a senior real estate analyst with Deutsche Banc Securities Inc. says he would never rule anything out in regards to another multifamily deal happening this large. “Given what's transpired, this is a $4 trillion market, and it is unpredictable.”
Marks does believe that M&A mega deals are over in the near term. “Most secured debt lenders are not in a position to provide financing on terms that were available six months ago,” he explains, referring to high leverage and low spread. “In addition, many lenders do not have the capacity to originate and hold for securitization large mortgages.” However, he notes that as buyers adjust their return expectations downward, and as more secured lenders re-enter the market, large transactions will be possible.
Commercial real estate debt is still a viable form of financing according to Marks. “The CMBS market in many ways has been unfairly tainted by residential MBS,” he says, adding that CMBS continues to perform well, despite recent spread widening.
“Despite a liquidity crisis in the CMBS market, the Archstone-Smith transaction was consummated,” Marks notes, “demonstrating that buyers are willing to pursue alternative forms of debt financing, albeit at a higher price than what was likely originally contemplated.”
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
