Since 2006 Grubb & Ellis Apartment REIT has acquired a geographically diverse portfolio of 14 apartment properties valued at approximately $358 million, based on purchase price. The REIT is currently in acquisition mode, seeking to raise approximately $1 billion in equity to acquire additional apartment communities with stable cash flows and growth potential in select U.S. metropolitan markets. Diana Mosher, Editor-in-Chief, Multi-Housing News, recently talked to Stanley J. (“Jay”) Olander Jr., chairman and CEO of Grubb & Ellis Apartment REIT, about opportunities in distressed properties, the multifamily construction pipeline, and supply and demand.
Olander was previously with Cornerstone Realty Income Trust Inc., a non-traded public real estate investment trust that owns more than 23,000 apartment units and was ultimately listed on the New York Stock Exchange with a market capitalization of approximately $1.5 billion. He has been responsible for the acquisition and financing of approximately 40,000 apartment units during his career.
What’s institutional capital up to?
Institutional capital is looking at the multifamily sector and we’re certainly seeing some activity there. I think it’s segmented into the major metropolitan areas, like most institutional capital generally is. And it’s probably segmented even further into the newer properties in those metropolitan areas. But we don’t see a huge push across the country of institutional capital at this point.
Unemployment seems to be slowing down and consumer confidence is less shaky than it was a year ago. What good news are you seeing for multifamily investors? And what’s the bad news?
The good news is that the fundamentals of our business are good. The occupancies are good and we’re seeing signs of rents starting to rise. If there’s any bad news right now on the investor front, it’s that pricing is probably going to be a little difficult for the next two years. The CMBS market still needs to shake itself out in terms of a large amount of refinancing that’s coming due. That’s going to create a little bit of uncertainty on pricing over the next couple of years.
Where is supply/demand headed?
In 2008, the number of new multifamily units delivered to the market fell to one of its lowest levels on record, and the new construction pipeline will continue to offer just a trickle for the foreseeable future—only around 100,000 units per year. Yet, according to the U.S. Census Bureau, over the next 10 years there will be 15 million new households in this country. Even if only 30 percent of these households rent an apartment, we will need approximately 450,000 new rental units per year to meet demand. If you look further out, the United States will be home to 94 million more people in 2030 than it was in 2000. Our population is booming, and we simply are not building enough housing to accommodate the growth.
What regions are you most optimistic about and why? What regions will take longer to recover?
We are very optimistic about the southern part of the United States, and we see some very distinct trends of people moving in the country from North to South—we’re actually buying where people are moving. The largest growth sectors in the country right now are those southern cities, while 20 years ago the growth was in Northern cities such as Detroit, Cleveland [and] Rochester. These were large industrial hubs. Now we’re seeing movement out of those towns into places like Dallas and Houston. San Antonio, Texas is [actually] the seventh largest city in the country now, although people don’t think of it as being that big of a city; it has truly grown up in the last 20 to 25 years.
Some of the toughest regions right now are those that are just plain overbuilt. They may be in good growth markets, but the supply is so great that it will take a lot to recover. There are a great deal of areas in Florida that are like that, as well as in Arizona and Las Vegas. These are markets that were really booming from a growth standpoint, where condo development and single-family development was taking off. Then the supply became too great. That excess inventory really has [placed] a big shadow over multifamily, and I think those are markets that are going to take longer to come back again.
What sorts of acquisitions are you interested in?
In late March, we closed on a 216-unit multifamily community in the Dallas suburb of Duncanville. Bella Ruscello Luxury Apartment Homes is a well-occupied and well-equipped luxury apartment community that adds immediate value to Grubb & Ellis Apartment REIT. It serves as concrete evidence of the favorable acquisition environment we currently enjoy; this exceptional property was acquired at a significant discount compared to what it likely would have traded for just a couple of years ago.
Bella Ruscello Luxury Apartment Homes was built in 2007 on approximately 10.6 acres. The property offers four floor plans, ranging in size from 655 square feet to 1,074 square feet, all of which include nine-foot ceilings, detached garages, track lighting, full-size washer/dryer connections, ceiling fans and other amenities. Bella Ruscello is currently 97 percent occupied. The property was acquired from Duncanville Villages Multifamily Ltd., an unaffiliated third party. We financed the acquisition with cash proceeds received through our follow-on public offering and financing provided by Fannie Mae, arranged by Berkadia Commercial Mortgage.
What are your thoughts on investing in distressed properties?
For the right distressed property, we always like to invest there. However, you really have to look at why the property is distressed. Is it a well-located, well-maintained property that solely is distressed because it has too much debt on it? Those are the types of properties we would look at. We think there are some very good opportunities there. If there is functional obsolescence, and the location is bad and it’s distressed because of that, we have no interest at all in the property. Truly, the moniker right now of the distressed property really can take on several different faces and you have to look at why it’s distressed.
What are your thoughts on managing assets through an economic downturn?
Through this downturn we have really managed for occupancy. Our general thought is that rents are going up, turn-over costs us money and maintaining occupancy is of paramount concern during a time like this. If we were in a different market—and rents were going up tremendously—we may not be managing for occupancy, we may be managing just for income. But in this sort of market, occupancy is what you have to manage for.
What do you think about investors getting involved in fractured condo deals?
If you have a large mass of units, fractured condos may make a lot of sense. Any time there’s a mixed ownership, that means there’s a mixed contribution to the common elements. So it just depends on how much you control—it may make sense, and it may not. In order for a multifamily operator to make sense out of something, you have to control a lot of the property to be able to control the common area elements, to be sure it’s well-maintained. If you’re in the business solely to sit there until the condo market comes back, I think that’s a different game. But to run it as a multifamily property, hopefully you have the majority of the property.
To comment on this executive insight, email Diana Mosher at email@example.com.