Gone are low down payments and high leverage. During the boom, one buyer financed a $200 million deal with just $3 million of his own money, plus a trust deed, mezzanine debt and equity, Wallace recalls. Today, that investor could buy a $6 million apartment complex. “That's what he should purchase. Not a $180 million apartment complex,” Wallace says.

Is this a good or bad time to invest? “If you're a short-term investor thinking you want to hit a home run, it's too soon to buy,” cautions Thompson. But it's a good time for a long-term investor, he says.

For Chicago developer McCaffery, this is no time for growth. “Who gets to have a job tomorrow? I'm very concerned — even at our own company and other people's companies — that there isn't a horrible depression or massive recession. You just have to be prudent about what you do. We're not going out and ordering jets. We're not ordering big boats, or doing buildings on spec. We're not going out and expanding,” says McCaffery.

As for obtaining credit in the future, McCaffery has confidence in his own banker. “We're with a very solid group of people. At least they appear to be solid. If they aren't, I wouldn't know where to go to find more solid people.”

Denise Kalette is Senior Associate Editor

Apartment investment sours in Phoenix, Florida markets

Not long ago, Phoenix was a hotbed of multifamily activity, as buyers streamed in from Southern California in pursuit of mega-deals. But since peaking in 2005, the number of closed apartment sales locally has declined by a stunning 80%, and the metro area's apartment vacancy rate stands at about 12%.

The most frequent deals — Class “B” and “C” communities with 100 to 300 units built in the 1980s — have been hardest hit by the slowdown, says Bill Hahn, managing director for broker Sperry Van Ness in Phoenix. “That was our bread-and-butter deal within our company, and that is the market where it is most difficult to finance acquisitions right now.”

Phoenix ranks among the nation's worst-performing apartment markets, says Gleb Nechayev, senior economist of Boston-based CBRE Torto Wheaton Research. It is fifth worst in terms of year-over-year revenue growth, a calculation of rent multiplied by occupancy, which in the case of the Valley of the Sun yields a 3.2% decline. The best-performing market by that measure is San Francisco, with 8.8% revenue growth year-over-year.

Developers are building more apartment complexes in San Francisco, including Trinity Properties' 1,900 apartments at Trinity Plaza on Market Street, and Alexandria, Va.-based REIT AvalonBay's 250 planned units on King Street.

A number of Florida cities rank high on Torto Wheaton's “worst” list, starting with Jacksonville, Fla. with a 5% decline in revenue growth, followed by West Palm Beach with a 3.9% decline.

Florida's economy remains relatively weak. As was the case in Phoenix, speculators in the Sunshine State drove up apartment vacancies with ill-timed buys of condos and second homes. Many were converted to rentals, and now compete with apartments for tenants.

Financing for large, 200- to 300-unit deals is scarce in Phoenix, but loans are available for 20 to 50 units priced from $1 million to $3 million, according to Hahn. “Small community banks will make apartment loans, and we've seen a comeback in seller financing.”

A recent trend is the arrival of Canadian buyers to purchase 20 or so condo units unsold from projects of about 200 units. “There aren't many individual condo buyers right now. We're seeing discounts of 30% to 40% on some of these bulk sales,” Hahn says.

Investors who bought early made money. Those who completed projects after mid-2006 probably missed out, he adds. “Some projects out there have sold 10% of inventory, and if they have 90% left they're pretty much doomed.”
— Denise Kalette