Middle-Market Multifamily Deals Still Flowing

Groceries and pharmacies have chugged along during the severe downturn, but they aren’t the only businesses that seem immune to the present crisis. Middle-market multifamily deals still bring out buyers and lenders ready to sign, even as other commercial real estate sectors go silent.

“We had about 20 deals ready to close in early March and only one has fallen apart,” Interra Realty Managing Principal David Goss said.

The Chicago-based company, founded in 2010 in the aftermath of another economic slowdown, brokers neighborhood multifamily deals, many valued between $1M to $5M. Goss added that this crisis is much different than the Great Recession.

“2009 was clearly a middle-market real estate depression. Everybody was overleveraged, no one could pay, and people were walking away from properties. It was a mess, and there was no neighborhood that was safe from it.”

Today he finds at least some reasons for optimism. The housing market has a much stronger foundation than a decade ago, with most properties having more equity and less overhanging debt, he said. Even though unemployment is soaring up at a historic rate, landlords have so far been willing to ease up on rent collection, while most lenders in turn seem willing to make temporary loan modifications.

“People are not working because the government said, ‘don’t work,’” and whether it takes two months or six months or even a year, this will pass, and lenders know it, so most say, ‘what do we gain by going through the whole foreclosure process which costs tens of thousands of dollars?’”       

Since Interra’s brokers began working from home in mid-March, the company closed five middle-market deals, and Goss said several more should close in the next couple of weeks.

“Nothing that has happened has affected the fundamentals of middle-market housing.”

The latest closing was for 4119 South Ellis Ave., a 23-unit apartment building in Chicago’s Kenwood neighborhood, bought by an out-of-state investor for about $2.7M, or $117K per unit.

“Large buildings don’t regularly go up for sale there, and when they do, they go quickly,” Interra Realty Managing Partner Lucas Fryman said.

“Although the deal was in the works well before COVID-19, the buyer faced considerable headwinds as a result of the pandemic that affected the original financing terms,” he added. “Ultimately, they stayed true to their investment strategy and were able to close the deal.”

The buyer used an acquisition loan from Fannie Mae, which Goss said is a good example of how the government has done its part and kept funds flowing into the market.

It isn’t as if there are no challenges to working in this new environment.

“I’m not going to be Pollyannish and say it’s business as usual, because it’s not,” Goss said.

The one deal that fell apart failed partially because it was too difficult to arrange the building inspections needed by the prospective buyer and its lender, he said. In addition, the Cook County Recorder of Deeds was closed due to the pandemic, and that led to delays on some other deals. The office is still closed, but now allows documents to be recorded electronically, and Goss expects the postponed deals to go forward.

It is also impossible to give tours to prospective buyers, but potential sellers keep coming forward, Goss said, so Interra is building up a long list of properties it will begin showing once the crisis recedes.

“We’ve got at least 10 new listings that are ready to pop. Everybody still wants to do business.”