Copyright 2008 Euromoney Institutional Investor PLC. All Rights Reserved

Real Estate Finance and Investment
July 14, 2008

StarPoint Sees Steep Drop In Acquisition Pace

StarPoint Properties expects its investment pace to be down 80-90% in 2008, dipping from about $400 million to about $40 million. The steep drop illustrates how much the commercial real estate market has changed over the past year, said Paul Daneshrad, ceo.

Daneshrad said that StarPoint is buying less because of the gap between seller and buyer expectations. "Risk-adjusted returns in commercial real estate don't make sense today and it will take at least another 12 months before seller expectations adjust to today's market realties and expectations. We also need time for the credit markets to stabilize and credit to open up," he said. Additionally, the Beverly Hills-based apartment specialist has tightened its underwriting parameters, which has affected the kind of deals it will close on.

Although StarPoint is looking at a lot more deals today than it did a year ago--Daneshrad estimated that the company analyzes 2,000 deals for every acquisition that it makes--it is still seeing fewer properties that it wants to buy. A year ago, the firm was looking at about 1,000. "Deal flow has gotten progressively worse," he added.

Daneshrad predicts an additional 10-15% correction in prices and expects that the market and transaction volume will recover by late 2009 or 2010. Despite this, Daneshrad believes in the multifamily market over the long-term. "Changes in renter demographics and the fact that the sector is not in an oversupply situation make the sector a favorable investment opportunity," he said.

StarPoint recently completed the sale of an 83-unit apartment complex in Los Angeles for approximately $17.1 million. The sale represented a 53% internal rate of return over the life of the investment for the company, which Daneshrad said was lower than its projected IRR of 84%, but still above the company's hurdle requirements and market expectations. He noted, however, that StarPoint is not selling more than it did in previous years.

Additionally, when StarPoint completes a sale, it is not deferring taxes in 1031 exchanges ­ it is paying the taxes and moving into cash, the first time in its history that it has done this. "This is a dramatic change for us," Daneshrad said.

StarPoint Properties is concentrated in the western United States, with 60% of its acquisitions in California. It specializes in multifamily housing and seeks properties of 100 to 500 units, targeting returns in the high-teens to mid-twenties.

--Kate Hallett
July 29, 2008