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Multifamily Action Kicks Off 2008

Aside from roller coaster economic news and continued mention of the “R” word, plenty of black ink has also been spilled of late when it comes to news in the nation’s multifamily market.

Of course, last year’s apartment mega-deal saw Tishman Speyer and Lehman Brothers buy Archstone-Smith, but just yesterday the company was back in the news, albeit for much less sensational reasons. It formally shortened its name to “Archstone.”

In late January, John Williams, the former founder and CEO of Atlanta-based Post Properties Inc., kicked off what is sure to be an interesting drama when he made yet another bid to take over his old company. This time, Williams is partnering with the deep-pocketed Cadim Realty Advisors, a division of Montreal-based Caisse de depot et placement du Quebec. Williams is offering $44 to $47 per share, or about $2 billion.

Ending months of buyout speculation, Williams’ bid has finally put Post in play. Earlier this month the company’s board agreed to consider the offer as well as solicit any and all bidders that might come forward. Given the relatively stable fundamentals in the apartment sector, and potentially huge long-term demand drivers such as the aging baby boom generation, most industry observers expect a bidding war to break out, which could likely lift the entire apartment REIT sector.

According to New York-based research firm Reis, effective apartment rents rose by 4.5% in calendar 2007, the highest increase since 2000. And despite softness in Sunbelt markets, rents rose in 73 of 79 markets Reis tracked across the country in 2007.

Post is riding high on those fundamentals. On Feb. 4, the company reported a 71.7% increase in its fourth-quarter earnings and an 82.4% increase in its full year earnings to $171.1 million.

But many investors are getting skiddish about high property valuations. The pace of apartment acquisitions slowed noticeably in 2007, with sales of significant properties down 60% in the fourth quarter of 2007 compared with a year earlier, according to New York-based Real Capital Analytics. Prices of garden apartments also dropped to $88,000 per unit in the fourth quarter, down from $92,000 at the end of 2006 and the record high of $96,000 per unit at year-end 2005.

In the wake of its own buyout news, Post has suspended sales of several properties, including two in New York City. So far, Williams has received backing from at least one Post investor, Pentwater Capital Management, which proposes to replace five members of Post’s board of directors.

Apartments have also become hot properties for investors once thought to be focused only on office and industrial properties. Dallas-based Behringer Harvard, an active investor through non-traded REITs and investment funds, has filed with the Securities & Exchange Commission to create a $1.48 billion private apartment REIT. Over the past year, Behringer Harvard has purchased eight apartment projects with nearly 2,400 units in six states.

The company is selling 120 million shares of common stock for $10 each, along with 30 million shares at $9.50 in its distribution reinvestment plan. Behringer Harvard’s co-investment partner, Dutch-based pension fund PGGM, has committed $200 million to the venture and could increase that commitment to $300 million.

Other investors are hoping to mine gold from the midst of despair, particularly in Florida. At least that’s the stance of a new joint venture between Miami-based Related Group and Philadelphia-based Lubert-Adler. The two are creating a fund of up to $1 billion to invest in mortgages, finished condominiums and raw land primarily in Florida.

Related Group has developed some $10 billion of condominiums across the country over the past decade, while Lubert-Adler is a private equity firm with a history of using joint ventures to target redevelopment projects.

Jack McCabe, CEO of Deerfield Beach-based McCabe Research and Consulting and a longtime Florida residential market watcher, predicts that when baby boomers begin retiring in 2010 and 2011, condo sales will pick up just when prices will become more affordable. “That’s where I see the real turning point for this downward cycle,” he notes.

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