The multifamily industry learned a lesson from the constant tumultuous transition it faced in the 1980s and early 1990s. Now, the cautious developer can make money going forward.

Investing in America's multifamily market over the past decade has been a little like riding a bucking bronco. The market has twisted, kicked, seemingly rested and has come back bucking and snarling. The ride might not yet be over.

Spurred by favorable tax laws and industry deregulation, the multifamily sector of the real estate industry took off like a racehorse in the mid-1980s. Record numbers of apartment units were built as financial institutions pumped development with a huge inflow of capital. The good times were relatively short-lived, as markets became glutted with vacant units and a deep real estate recession cast a gloom over the land. By 1990, the apartment market was in disarray. Fortunately, the bad times didn't last long, either.

With a lack of new development, vacancies became occupancies. An increased investment interest from the formerly disinterested Wall Street and the suddenly empowered real estate investment trust industry pushed multifamily back to the development and investment forefront of the real estate industry. That initial thrust, which really peaked about 1993-1994, is subsiding and the apartment industry once again is headed for a transition period.

"The apartment industry has been extremely active in the last five years and has changed dramatically in that time. It will continue to change through 1995," says Michael Mueller, vice president of CB Commercial Apartment Properties in Phoenix.

Hopefully, the changes won't be as dramatic as they were in the past. While the REIT industry, which fueled transactional business and new development over the past few years, has waned due to high interest rates impeding the ability of REITs to capitalize, other financial sources such as pension plans and traditional sources of capital like insurance companies and banks have come back to the market.

The current crop of investors like the continually improving benchmarks of the multifamily industry. The national vacancy rate, as reported by M/PF Research for the National Multi Housing Council, was as high as 12% during the late 1980s and has continually edged downward to about 9.4%.

"Out of the 54 markets we track, the majority of those are maintaining occupancy rates in the mid and upper 90%," says Ron Witten, president of Dallas-based M/PF Research. "Most markets nationally are in good shape."

The metropolitan areas of West Palm Beach, Fla., Las Vegas and San Francisco are at the top of Witten's list of best performers, all with an occupancy of 97%. Close behind with 96% occupancies are Detroit, Austin, Texas, Fort Lauderdale, Fla., Raleigh, N.C., Salt Lake City and Greenville, S.C. In fact, there were only two markets that reported below 90% occupancy: Miami and Cleveland.

As occupancies have improved, rental rates in selective markets have moved up as well. For example, last year in Phoenix, apartment owners enjoyed a 9.5% rate increase. In addition, general employment growth, which in turn creates the need for new residential formation, reached a six-year high of 3% last year. "In most metro areas of the country, job growth has been good and housing demand somewhat stronger than anticipated," Witten says. "The acceleration is still reflective of the demand that is there."

In selected metropolitan areas, construction has come back strongly with a continued acceleration in volume. Rental starts posted the strongest consecutive quarters since 1990 in the second and third quarters of 1994. Annual starts are expected to total 175,000 for 1994.

No one in the real estate industry an, ticipates that the overbuilding of the 1980s will come back to haunt the apartment market in the 1990s. What is hoped for is an equilibrium between supply and demand.

Many of the markets, particularly those in the Sun Belt, were grossly overbuilt in the mid to late 1980s. It has taken some of these markets until 1992 and 1993 to trim the inventory. "That has all been absorbed," says Thomas Trimble, president of acquisitions at MIG Realty Advisors in West Palm Beach, Fla. "And it has been recent enough that there has been a little more caution in the market as it relates to creating new property."

This year, MIG hopes to do something on the order of $300 million in total investment. The vast majority of that investment would be in purchasing stabilized proper, ties - Class-A and -B quality garden and mid-rise apartments. The remainder would be for new development that is presold. "We are still geographically diverse," says Trimble. We are very active in the Southeast, with some activity in the Midwest. MIG recently closed three deals in Texas and is looking more in the Southwest where we would like to do more business."

According to Alan Sweet, president of Chicago-based Amli Capital Inc., there were 500,000 to 600,000 apartment units developed in 1986. It is generally assumed the country needs between 250,000 and 300,000 units each year to satisfy obsolescence and new demand. This year, Sweet estimates the industry will create 250,000 new units.

"Some markets will be oversupplied. There will be certain markets that won't get enough new supply, but on a nationwide basis it won't be terrible," Sweet says.

Jonathan Kempner, president of the National Multi Housing Council in Washington, D.C., says his concern is that apartments "could be sexy one day and no one would want to deal with us the next day - and the last two or three years apartments were the sexiest class by far." Kempner is not too worried, however. As he sees it, the apartment market has settled in that comfortable equilibrium that the industry would hope for. "People are interested in the asset class. Occupancy rates are generally up. Returns are pretty healthy. There is a general sense of well-being in the industry, not the euphoria of a year or two ago that was hard to sustain, but a realistic, solid performance," Kempner says.

The Atlanta-based Vinings Group, formerly M.F.I. Companies, recently changed its name to coincide with its new outlook. The Vinings Group now will focus on Class-B properties looking for moderate rehab that don't really compete with REITs, says Peter D. Anzo, president. Also, the company will focus on acquiring, or merging with smaller apartment management companies and owners, he says. "We had been jumping around from Class-A to Class-D properties," he says.

"We have a fresh name to go along with our fresh outlook." "Vinings" comes from the name of the company's building, Vinings Point, which they purchased a couple of years ago. Anzo says that his company is expanding its office space with the addition of a new 6,800 sq. ft. building adjacent to the existing 6,800 sq. ft. headquarters.

In the mid- 1990s, some people like the depth in the multifamily market. Initially, most investors and developers were only interested in Class-A properties and perhaps a high Class-B property. Now, there is a movement to Class-B,-C and even -D properties where investors will buy and then rehab to a higher level. Pension funds, which usually never stray below the Class-A property level, are now considering investing in lower grade properties. This has a lot to do with the cost factor as the renewed, interest in apartments has pushed prices up too high to make the investment worthwhile in terms of expected yield.

Some people don't like the fact that the apartment market is a tougher place to build than ever before. There are some universals involved in new construction:

* Basic zoning requirements are much tougher now than they were in the 1980s.

* Substantial equity, 25% to 30%, is required on the part of the developer.

* The cost of building supplies, such as lumber and cement, is more expensive.

* Neighborhood groups have become more strident and active in opposing much new development.

* Land costs have increased.

The cost of land has risen dramatically, observes William Millichap, president of Marcus & Millichap in San Francisco. "If you look at the cost of land in 1992-1993, and since then, depending on the market, the same land could have jumped in value 30% to 100%. Prior to 1993, there was nothing going on. You would have to go back to the 1980s to see that kind of movement in prices."

The hottest market in terms of land zoned for apartments can be found in Phoenix, Tucson and Denver. "We have offices in Chicago, but it is slow," says Millichap. "Apartment land sales in Chicago have never had the enormous swings that the Sun Belt cities have had. In other cities such as Seattle, it's difficult to acquire land and sales have been relatively modest, while in places like Northern California rents aren't high enough to buy land for apartments."

The apartment market is widely diver, gent across the country. Some cities, mostly in the Sun Belt, have aggressive investment and development while other cities have been devoid of activity.

"What really fuels development is economic growth," says Michael Goldsmith, group president of Heller Real Estate Financial Services in Chicago. In some places like Dallas and & Phoenix, tens of thousands of new jobs have been created over the past two years. On the other hand, some cities have experienced negative growth. "One job produces two-plus family formations. There is a lot of pent-up demand created through job growth, which is why you see a lot of development going on in Sun Belt locations."

While there has been a lot of activity in areas stretching from Florida and Atlanta through Texas to Denver and Phoenix, developers and investors generally have drawn a line at the Colorado River, which separates Arizona from California. However, California's moment in the sun might be returning. CB Commercial's Mueller, who deals with most of the Southwest markets, says: "From an investment standpoint, the biggest potential increase is probably in the Southern California marketplace. That's where all the investors say they want to be."

Earlier this year, when Ernest & Young Real Estate and Construction Services named the 10 most undervalued and underbuilt apartment markets, Los Angeles, Riverside/San Bernadino, San Jose and Oakland ranked in the top four places.

"All these markets are clearly speculative, but they possess attributes which would indicate that they will perform well in the next three to five years," explains Michael Evans, national director of Ernst Young Real Estate and Construction Services in San Francisco. Other markets on the list include Phoenix, Boston and several Florida cities including Miami, Fort Lauderdale, Orlando, Tampa and St. Petersburg.

Manhattan didn't make the list, but could be a surprising candidate. Jack Heller, of Heller-Macauley Inc., says the rental market in Manhattan has seen huge growth. "It is the hottest market in New York."

There was a point in time from 1982 through 1986 that the for-sale market began to outpace rentals in New York, which has the second-largest rental market per capita in the country behind Newark, but Heller says: "This has always been and always will be a rental-base city. The rental market was strong in 1994 and will continue to be so in 1995. There are almost no vacancies."

The market has performed so well that a number of new apartment buildings comprising a couple of thousand units were started last year and will come on, line this year.

No matter which city, developers who tarry will be too late. Heller's Goldsmith says that already a lot of the easiest sites already have been developed. However, he adds optimistically, as communities expand, sites that weren't attractive five years ago become attractive.

There is enough demand to fill the supply of product being built, Goldsmith says. More importantly, from a financial point of view, there is enough institutional demand in the completed product that the project could be sold at attractive cap rates. "In other words, the developer can make money going forward."

1. Los Angeles

2. Riverside/San Bernardino, Calif.

3. San Jose, Calif.

4. Oakland, Calif.

5. Phoenix

6. Miami

7. Fort Lauderdale, Fla.

8. Orlando, Fla.

9. Tampa/St. Petersburg, Fla.

10. Boston

Source: Ernst & Young

The whole notion of apartment living has undergone a radical change. Not so long ago, apartments might have been considered a temporary stop before buying a home. In the minds of many, apartments now have become permanent residences.

Cliff Lavin, vice president and director of marketing at GE Capital-Rescom says that people are choosing apartments as permanent residences because apartments offer "freedom of lifestyle." A lot of people today, he says, do not want to be tied down to home ownership. The American dream has not been changed, he says. It has just been modified. "People still want a place to call their own."

The change in the mindsets of tenants has not yet been reflected in the management and design of apartment buildings by owners and developers.

"Obviously, many people live their whole lives in apartments, but there may be ways of promoting the notion of apartment living as a permanent lifestyle," says Joseph Coates, president of Washington D.C.-based Coates & Jarratt Inc. "When considering the problems of home ownership, the apartment house becomes a very attractive alternative."

But, Coates maintains, apartment living could be a more attractive alternative if the multifamily industry responded to demographic changes by anticipating and meeting the need for new services, different designs, new unit configuration and technological innovations.

He says the apartment of the future will have to be bigger than the apartment of today, because it will have to accommodate the person who works offsite, an increasing phenomenon of the corporate world. Today, about 3.5% of the workforce is in offsite, or distributed, work. That percentage is expected to grow to 20% by 2005 and 40% by 2020."An increasing percentage of Americans work at home and it is not going to be enough to have that little table in the bedroom or the word processor parked atop the breakfast table," Coates says. The three-bedroom apartment will have to become the four-bedroom apartment and the four-bedroom apartment will have to become the five-bedroom apartment. The extra room would be for an office, not visiting guests. The apartment complex of the future also will have a lobby conference room, overnight mail pick-up and other types of collateral support structures.

It's not just layout, however, that will accommodate the work-at-home apartment dweller, but technology as well. "Information technology is the most powerful force shaping building management and operations and the lifestyles or residents," Coates says.

Residents are looking for the "information platform" that will enable people to work out of their apartments. Lavin calls it the "plug and play capability." If apartments allow residents to access the internet, utilize video conferencing and attend to their business from home, they will be more attractive to professionals.

That same technology also can create better standards of living for apartment dwellers as well. In the future, every aspect of building management can be monitored through information technology. For example, energy use, communicating with residents and rent collection could all be automated. At the same time, residents could enjoy using telecommunications and information technology for entertainment and educating their children.

It's important to note that the economies of scale in multifamily structures allow the industry to offer cutting edge technology to residents, which is why private phone companies such as ICS, GE Capital-ResCom, Optel Cable and Cable Plus are all targeting multifamily dwellings.

As Andrew Adelson, co-chairman and co-CEO of Los Angeles-based ICS, observes, new "smart" buildings can offer services usually associated with good hotels. Along with a full range of cable and telephone services, communications companies can now offer everything from electronic home monitoring security to remote paying.

High technology communications, Adelson says, will give apartment dwellers in the near future transactional programming, on-line link up, video on-demand and in-home access to goods and services. "The day is coming when everything from ski trips to sushi can be bought and paid for from the comfort and privacy of the home," he says.

The apartment of the future will be an information-dense fortress, says Howard Ruby, chairman of Newport Beach-based GE Capital-ResCom, a provider of single-source telephone, cable TV and security services exclusive to the multifamily industry. "It will offer energy management and appliance controls accessed through the telephone. Two people who are many miles apart will work together through video teleconferencing technology." Apartments, Ruby says, will have cutting edge security: residents will turn on their television and visually identify visitors at the perimeter gate.

Apartment developers will be seeking the next level of competitive advantages beyond the prime location and latest design features. They will do this, Ruby says, by incorporating hardware, networks and cutting edge systems that will provide even more extras for residents, including private phone systems, home tele-theaters, video teleconferencing, movies on demand, interactive shopping and energy and environmental efficiency.

Cable Plus offers property owner a way to take advantage of continuing technological advancements. Cable Plus maintains that a cornerstone of its business is its alliance with AT&T for the provision of telecommunication equipment, technical support and the use of its long-distance fiber optic network.

The alliance with AT&T will provide the platform for future technologies and services for apartment community residents. AT&T is currently performing tests with companies such as Sega of America, US West, GTE, TCI and Pacific Telesis Video Services to offer interactive programming, simultaneous play video games and services, access to video and audio libraries and electronic shopping and news services.

Cable Plus says it is poised to deliver these services today and into the future. Cable Plus provides dual telephone jacks for each jack location in every apartment and throughout the leasing offices and recreation facilities enabling residents to use current home electronics and enabling the use of future electronics equipment and services. Future services could include video and audio on demand as well as a host of other attractive residential telephone amenities.

Technological improvement to apartment life can be divided into different trends:

* The trend to increasing telecommunications and information technology power could lead to such amenities as fiber optic hookups, internet access, built-in entertainment centers and resident-focused electronic bulletin boards

* Increasing use of image technology allows interactive designs that could lead to such amenities as electronic tours of the apartment community and virtual reality decorating and design.

* Information technology in the home could lead to such amenities as smarter kitchens and coin-free laundry facilities using smart cards, debit cards or access codes.

* Smart building technologies can lead to such amenities as systems that link security, safety, energy, entertainment, lighting and communications, and remote diagnosis and repair.

The implication for apartment owners, says Coates, is that they should offer the latest technology to residents, make a commitment to stay in front and consider all aspects of operations and management for possible transformation by information technology.

Managers of individual properties are striving to improve the physical plant as tenants and investors come calling. Declining vacancies should not be an inducement to complacency. The market is still competitive and will be more so as new construction is lured back by rental rate improvements.

In addition, a number of investors are still looking at multifamily dwellings, and assiduous asset management is still a necessity.

Pam Hille, president of GE Capital Realty Group, the Dallas-based asset management arm of GE Capita, says her company sees high growth in four areas; the pension advisory business, where there has been a lot of consolidation; international; corporations; and the commercial mortgage-backed securities market.

"We create value through improving properties and improving cash flow," Hille says. GE Capital Realty manages with the eventual intent to dispose of properties. Holding, however, can be short-term or for 10 years.

"Our other strength is liquidating in a timely manner," she says. "This has been one of the criticism of the industry, that there has been little disposition for investors like pension plans."

Whether managing property for others or for one's own business, property management has to be aggressive as the market continues to transition.

Industry trends increase attraction

Stacy Hunt, executive vice president of Houston-based Greystar Management Services, lists several industry trends, including technological advances, that are working to increase the attraction of the multifamily industry:

* Owners and managers carefully review revenue enhancement options such as private telephone and cable systems.

* Consolidation of fee management firms creates larger firms which can offer cost savings to clients through bulk service and supply contracts and master insurance programs.

* Communication between site, a manager's main office and a client's office is improve by computer software and hardware enhancement including linkage through E-mail.

* The industry is improving as more college graduates select careers in multifamily management due to higher pay scales, better training and a new image for today's multifamily management professional.

"While the rental market is improving and vacancies are decreasing, tenants, used to major concessions over the past few years, must be re-educated regarding the changing markets," notes Charles S. Troy, president of E&S Ring Management Corp., Los Angeles. "Owners who have put off maintenance now must substantially upgrade their properties and add new amenities if they hope to compete effectively for quality tenants who have become much more demanding."

According to Troy, some challenges facing apartment owners include: renters expecting more amenities; upgrading of highly leveraged properties; re-educating tenants to the changing rental market; security; rising cost of utilities; and employee safety.

A successful property management firm must excel at creating value for its clients and must be capable of reacting quickly to changes in the marketplace, says Carol Mackinnon, executive vice president and chief operating officer of Harbour Realty Advisors Inc. in Miami.

In Mackinnon's view, successful property managers need to understand the profile of renters and must install skilled, on-site property managers with a customer-service orientation. "The on-site managers must possess good judgment so they can react quickly to resident issues and identify opportunities for improvements to field supervisors and senior management."

Property managers need to know how to get the most bang for their buck, Mackinnon says. "Working with limited financial resources, a good property manager must understand which upgrades will generate the greatest payback relative to the dollar invested."

To make the decision to rehabilitate or wait, says Hunt, managers must examine several factors:

* Managers must carefully perform cost/benefit analysis. For example, will renovation produce higher rental rates or occupancy or reduce turnover? Or is the market so stagnant that improvements are not merited?

* If property is prime for disposition, improvements are usually best left to the new owner, since items such as color scheme changes are individual decisions.

* If renovation includes deferred maintenance, the owner must be careful not to create greater headaches down the road if the decision is made to wait.

* Due to financial obsolescence, such as outdated floorplans, many properties are not candidates for renovation beyond normal upkeep.

Princeton Properties, a Lowell, Mass., manager and owner of apartments, recently won the 1995 Pillars of the Industry Award for the country's best multifamily rehabilitation for its 358-unit complex in Salem, Mass., now known as Princeton Crossing. The complex had fallen into disrepair, then Princeton Properties took it over and invested $3 million. The company assembled a team of experienced rehab specialists, and a schedule was established to ensure that the project proceeded on time.

"In considering whether the value of a rehab will add to your property and is worth the investment, consider what will happen if the property is not renovated," says Terence F. Fahive, president of Princeton Properties. "Property that falls into disrepair drops in value and loses tenants. It also attracts a less stable tenant population and property damage increases. While revenues fall, basic operating costs remain fixed, so profits are squeezed."

Every time a tenant leaves, an apartment stays vacant for an average of 44 days and typically costs more than $1,500, including cleaning and maintenance, to replace the tenant.

To make life easier for property managers, a number of companies have been formed to save dollars through volume purchasing of such items as appliances, lighting and carpets. Reston, Va.-based Property Services Group Inc. has a service called Buyers Access, while GE Capital Commercial Real Estate has a program called Power Buyer Service.

The older of the two, Buyers Access, now boasts 500,000 membership units under 175 different management companies. "We can negotiate better deals because of our large membership," says Joe Stefan, president of Property Services Group. "Members can get access to reduced prices and to professional purchasing services."

Buyers Access provides access to reduced prices on products and professional assistance for property owners. Using the combined purchasing power of its membership, the company can negotiate deals for members with qualified national and regional suppliers. Using purchasing guides supplied by Buyers Access, members purchase directly from the suppliers under their pre-established Buyers Access accounts.

GE Capital's Power Buyer Service, is a value-added program for customers of the parent company. It acquires through bulk buying, passes on discounts and warranties and offers free audits in connection with a variety of services or products that managers would use. In addition to the expected lighting and appliance features in the Power Buyer Service, the company offers similar service for carpets, roofing, water conservation devices and heating and air conditioning.

The service was formally started in 1995. By taking advantage of GE's $16 billion portfolio leverage, says Dan Miranda, manager of services for GE Capital Commercial Real Estate, the company can offer cheaper price tags, more responsive management and some free services that are typically done on a fee basis.

In April, Brazos Fund, L.P., an opportunity fund in which BlackRock Asset Investors of New York is a 50% partner, completed its first transaction, the purchase of $150 million in loans and real estate secured by 2,405 units in seven multifamily properties.

One month earlier, MIG Residential Real Estate Investment Trust made its first acquisition, a 186-unit apartment complex in Atlanta. The purchase price wasn't disclosed.

In January, McCaslin Development secured a $16.1 million construction loan from Guaranty Federal Bank to build Riverhill Apartments in Grand Prairie, Texas.

And who says multifamily has lost its shine? Actually, the asset class is in a transition period. Still liked by investors and lenders, the field is awash in capital. Unfortunately, despite all the potential financing the good deals may be a thing of the past and all that capital may be a hindrance as some lenders start to pull back due to a congested playing field and as yields continue to pitch downward.

"While some lenders are busy, the competition is such that a lot of capital is chasing really too few deals at this point in time," observes Bronwyn Morgan, director of multifamily housing for the Mortgage Bankers Association in Washington, D.C.

According to Scott P. Ledbetter, president of Memphis-based SPL Corp. and chairman and CEO of LEDIC Management Group: "There will continue to be too much capital chasing too few deals as long as multifamily real estate remains in favor. This will change -- and the change in inevitable -- when the balance of supply and demand shifts and forces downward pressure on occupancies and then on rents. Most financial institutions will remain alert to future signs of change, but history has shown that obvious trends escape just enough of the developers and lenders to cause a major down cycle due to overbuilding.

"A new potential threat to stability in this development cycle is the introduction of apartment REITs into the supply vs. demand equation. For example, with rising interest rates, falling cap rates and a diminishing supply of Class A quality properties for sale, REITs have turned their attention to development to meet yield requirements." SPL Corp. is an investment brokerage and market research firm specializing in apartments. LEDIC Management Group is the property management affiliate of SPL Corp. and manages over 20,000 multifamily units in the Southeast, including Memphis and Nashville, Tenn., Atlanta, Charleston, S.C., and Jackson, Miss.

"It's a borrower's market," says Dave Henry, vice president of America's Origination at GE Capital Commercial Real Estate in Stamford, Conn. "We are seeing increased competition from all sources. As a result, underwriting standards have started to relax, which we hate to see."

The company recognizes the difficulty in meeting standards in the crowded marketplace but expects to increase its total business slightly in 1995 and increase the amount of multifamily. "We would like to target 45% of our loan portfolio to be multifamily," Henry says. "If anything we are more aggressive with multifamily."

On the other hand, Berkshire Investment Advisors, a Boston-based institutional money manager, will be less aggressive with regard to multifamily, especially with pension plans.

"Basically, we decided to focus our business on looking for private money sources and staying away from the pension area, which we had originally envisioned as the way to go," says Ross Keeler, president.

Spreads that are being offered in the marketplace have changed considerably from just a year ago. "The spreads have narrowed tremendously as a great deal of capital has come into the market," Keeler says.

"Everybody is back," exclaims Shekar Narasimhan, president of Washington Mortgage Co. based in Vienna, Va. "All the lenders that left the business are back. Insurance companies, savings and loans, pension funds, Fannie Mae and Freddie Mac are all back."

The result of all this, Narasimhan says, is that spreads have continued to tighten even though interest rates have dropped.

Reportedly, apartment loans now are being underwritten at 120 debt cover again. The 120 debt cover is the amount that the net operating income has to cover the debt service payment. The standard in the industry for the past 3 1/2 years has been 125, which means there is a reduction in what the market perceives as necessary to make a conservative, investment-grade loan.

Gaye Beasley, president of Bethesda, Md.-based Patrician Mortgage, observes the same disquieting trends as Narasimhan. "Last year was extraordinary competitive. This year the competition for standard apartment properties will be pretty fierce."

Beasley says she believes the competitive marketplace will hurt a lot of mortgage companies, especially those that don't have access to a conduit or a program like Freddie Mac.

Jeffrey A. Davis, president of Chicago-based Cambridge Realty Capital Ltd., says he thinks the competition will continue for awhile, but not with the same fervor. He says that a lot of investors and lenders had not diversified their product types, but that now they are starting to do so, Cambridge Realty Capital Ltd. and its two affiliated companies, Cambridge Realty Capital of Illinois and Stanford Properties Ltd., combine to form an integrated real estate organization.

Neil Cullen, executive vice president with AMI Capital Inc., based in Bethesda, Md., agrees with Beasley. "There are more sources of capital in the marketplace. Fannie Mae, Freddie Mac, insurance companies, big banks, some thrifts and credit companies are all heavily interested in financing apartments."

Cullen says that his company will be smarter and compete more effectively to combat the competition in the marketplace, which he predicts will last through 1995 and the foreseeable future. "We have new programs for financing tax-exempt and low income housing tax credit (LIHC) properties, mobile home parks, whole loan purchases and senior housing. We will also put more emphasis on FHA financing and our securitized sources," he says.

The Reston, Va.-based Federal Home Loan Mortgage Corp. (Freddie Mac) came back into the multifamily mortgage business on a full-time basis last year. Mitchell Kiffe, director of multifamily underwriting, notes, "We bought about a billion dollars of multifamily mortgages in 1994 and we expect to target $1.5 billion in 1995."

Kiffe says Freddie Mac's main focus is its conventional cash program for the refinancing of acquisitions or the moderate rehabilitation of quality apartment communities.

At the Federal National Mortgage Association in Washington, D.C., about $5 billion worth of business was done on the equity side of the multifamily asset class.

This year the company is aiming for $6 billion. "It is not going to be easy, given the slowness of the general market in the first quarter," says Thomas White, a senior vice president at Fannie Mae, "but we have an awful lot of major swap transactions in process and a lot of people are talking to us right now about different products."

According to a recent report from Marcus & Millichap, as the second quarter of 1995 unfolds, there are some significant trends and factors investors should note:

* Pension funds have replaced REITs as the most aggressive institutional purchaser of investment real estate.

* Lender foreclosure activity for the last 12 months is less than the previous 12 month period.

* The increase in interest rates has moderated the increase in prices of investment real estate.

* Private investors are coming off the sidelines, particularly in Southern California.

* Lender properties are attracting an increasing amount of investor interest.

* The gap between buyer and seller expectations has widened since rents and values have increased.

* 1995 will be a good year to buy quality properties in stable to improving areas, and to sell properties in marginal or declining areas.

According to the report, the nation's investment real estate reflects a positive outlook and sets the stage for a promising second quarter.

The real estate investment trust (REIT) market has been weak since the middle of 1994 due to rising interest rates and a glut of new issues that came to market during the 1992-94 period.

The rise in interest rates not only made the cost of money more expensive but showed alternative interest rate investments to be more attractive than REITs, causing capital to flow from one to the other.

In 1992, there were two publicly traded multifamily REITs with a capitalization rate of $500 million. Today, there are 32 multifamily REITs with a cap rate of $11 billion. The explosion of new issues has spread investment and investment interest to many more companies than existed three years ago. The larger number of REITs means there are more entities chasing the relatively static supply of good apartment projects that come up for sale, thus raising prices at a time when yields are declining.

How REITs intend to operate in this period of market transition really depends on the individual REIT and its financial strength.

Camden Property Trust, based in Houston, boasts relatively low debt levels due to a secondary offering in 1994. The company is leveraging its balance sheet and using lines of credit to expand. "We will be building our debt up by continuing to build properties. We are not acquiring," says Rick Campo, chairman. "Spreads are still pretty attractive in new development."

Moving in the opposite direction is Walden Residential Properties of Dallas. "We have done a lot of development in the past," says Don Daseke, chairman of the board and president, "and we think it is a better risk-reward for our shareholders to buy well-located properties." The company, which owns 12,697 units, would like to acquire between 2,500 and 3,000 more units in 1995, he says.

In April, Walden closed a $62 million long-term mortgage loan with Northwestern Mutual Life Insurance Co. Most of the proceeds from the loan will be used to repay variable-rate mortgage debt, but a $9.8 million slice was used to purchase an apartment complex in Houston.

The price of the acquisition was $14 million with the remainder of the capital coming through an exchange of stock.

Walden is working on a couple of transactions using exchanges of stock, Daseke says.

Essex Property Trust of Palo Alto, Calif., is working in two directions, buying existing properties in metro areas along the West Coast and doing some new development as well.

"Essex has about a 48% to 50% leverage rate, so we are trying to deploy some of our assets," says Keith Guericke, president and chief executive officer.

The company is working to sell two apartment buildings and will use the income to pick up other properties with higher growth rates.

"We are selling, or exchanging, properties that we believe are fully priced. That is our fuel for acquisitions," says Guericke. New development, however, will be financed by lines of credit.

Rockville, Md.-based CAPREIT hoped to go public in 1993, but ended up being a little late in the game, so it went looking for private capital.

Apollo Real Estate Investment Advisors obliged by making CAPREIT one its largest real estate investments for its Apollo Fund.

In addition, CAPREIT secured a $95 million line of credit from GE Capital which it used to expand the company. Now 6,900 units strong, CAPREIT IS looking to increase the size of its portfolio in terms of acquisitions and management contracts. It also will start some new development. "The financing for all that is in place through our sources, both on the private side and through GE Capital," says Richard Kadish, president and CEO. "While GE Capital is not planning to do our construction loan activity, they will provide permanent take-outs for us." He adds, the constraints for us will be on the economics of the projects rather than the capital.