So you want to buy an apartment building in Texas. Until recently, that would make you just another face in the crowd of buyers flocking to the Lone Star State’s booming multifamily market. But a combination of expensive debt, cautious lenders and pricing paralysis has thinned the crowd significantly in recent months.
Still, some buyers are making deals work, convinced that a market downturn is the best time to buy.
The same conditions that set investors screaming down to the Texas Triangle still exist. People and jobs are moving to the state’s cities in droves, forming households and renting new apartments. But uncertainty across the market on pricing, interest rates and costs has ground multifamily sales to a halt, emptying out what was once a crowded dance floor. The few investors left boogying can pick up valuable properties at a relatively low basis, if they can make the money work. These days, that’s a big “if.”
Less money, more problems
Debt has become more difficult to get — not only is it more expensive, given higher interest rates, but lenders are generally taking a step back from the highly levered deals yesteryear. Loan-to-value ratios have decreased by roughly 10 percent since early 2022, according to a report from IPA Texas, a multifamily brokerage and research firm.
While that makes it harder to find acquisition financing, it also means that debt for construction is more expensive. That complicates value-add plays, one of the most popular strategies for Class B and Class C apartments in Texas.
That has made access to equity more valuable than ever.
“It’s mainly small and mid-sized private equity groups, both local and out of state,” who already have money set aside, or can tap a small, close-knit group of investors with deep pockets, said Al Silva, a multifamily investment sales expert at Marcus & Millichap.
Those firms can come to the table and close in 45 days. There’s no need to travel across the country raising money — several deals that have closed in Texas this year went not to the highest bidder, but to the one with money in hand.
“Sellers have realized there’s no knight in shining armor who’s going to come in and pay 20 percent above market,” Silva said.
Pricing
A deal requires a buyer and a seller, and there is still a gap between what sellers think their buildings are worth and what buyers are willing to spend for them. The gap is particularly noticeable for owners who purchased their buildings in the past three years, when even Class B and Class C properties saw major value increases.
Those buyers often took on high debt loads and paid significant premiums in bidding wars. The prospect of selling at or below their debt value is unappetizing, but with loans and rate caps expiring, that may be the only dish on the menu.
Better off are the landlords who have been in Texas for more than three years. They are still in the black on their investments, and they see a chance to make their next play while the competition is less intense.
“They know they’re not selling at the top, by any means,” Silva said. “But they can sell, get a return to their investors and turn around and go buy something else.”
Distress opportunities are starting to show, but industry experts think the larger meltdown is yet to come.
The last six weeks of the year are usually slow for investment sales. Some brokers are “buying” listings by promising higher prices than they can get. But once assets really start to hit the market in January, many won’t be seeking a profit — they’ll simply be wondering how much equity they can save.
Still syndicating
Some 21 percent of multifamily investors said they are more active than they were a year ago, according to a survey from Cushman and Wakefield. Meanwhile, 43 percent believe the best buying opportunities are six months away. That gap suggests one of two things: there’s a rush of activity that will come to market in the next six months, or people expect to see deals but won’t have the financing to make them.
The distressed opportunities that have already hit the market have come largely from multifamily syndicators, many of whom came to the market in the last few years and paid huge premiums for aging properties with huge amounts of floating-rate debt.
Their properties that have sold, often in distress, are an indicator of the types of deals to come. In several cases, that has meant the asset just passes to another syndicator.
Read more
Commercial
Texas
Multifamily goes from darling to distress in Texas
Commercial
National
Tides Equities flew too close to the sun. It wasn’t alone
Commercial
Dallas
Texas’ fastest-growing multifamily firm sees opportunity in Sun Belt’s madness
Disrupt Equity, a Houston-based syndicator, bought three Texas apartment complexes previously owned by Nitya Capital for $93 million. The developments had previously been watchlisted for “major life safety issues,” and Nitya, another syndicator in Houston, has faced low debt service coverage ratios at other properties.
Disrupt manages a reported 6,400 units in Texas metros. The three properties it bought from Nitya — Stonecreek in Katy, Waterstone Place in Stafford and Treehouse in Austin — bring its assets under management to around $800 million, according to a news release.
The deal worked, in part, because Disrupt took on the $68 million CMBS loan Nitya had secured in 2019. That debt has a 3.8 percent interest rate, far lower than prevailing rates. Assumable debt has been one of the few recipes for making multifamily deals happen.
Disrupt also closed the deal with Open Door Capital, a real estate investor that promises on its website to make real estate investing “simple, passive and profitable.” With debt more expensive and offered in lower amounts, additional equity is critical.
In October, multifamily syndicator Mosch Capital purchased Cielo at Azulyk, a 32-unit property in Austin.
Investors who have been eyeing potential distress for months have begun to pounce. Ashland Greene, a Dallas-Fort Worth firm that recently ranked as one of the fastest growing businesses in the country, has seen opportunity coming.
In November, it bought Devi at Valley Ranch, a 267-unit building in Irving, from Sun Belt multifamily firm Tides Equities. Tides, like many other firms in the space, has seen debt costs skyrocket along with interest rates. Devi sold for a 10 percent discount from what it was worth a year ago, according to a news release announcing the deal. While Tides recently said it has secured workouts on several dozen loans, negotiations were still ongoing for some of its other Texas properties as of November.
Ashland Greene backed its purchase with a 6.25 percent Freddie Mac loan, and the firm plans to carry out value-add renovations at the property. Agencies have proven to be one resilient source of financing on some multifamily deals, with 46 percent of multifamily investors who responded to the Cushman and Wakefield survey saying it’s how they financed their deals.
As dealflow heats up, whether for lower rates or greater distress, Texas apartments will still have buyers. Those playing the long-term game are already searching.
“Focus on the big picture, not basis points. Focus on the generational story that we’re living here in DFW and in Texas, overall,” Silva, the Marcus & Millichap investment sales expert, said. “That story is still well intact.”