Finance: Year in Review

Multifamily continued to be favored in 2013, but are there signs of moderation?

Is the bloom coming off the multifamily rose as the economy slowly improves and investors’ risk appetites go up? Even as multifamily prices nationwide have recovered from their recession lows, it seems sales momentum has started cooling off in 2013. Real Capital Analytics reports that the second quarter of 2013 saw the first year-over-year drop-off in sales volume of multifamily properties in a number of years when compared to the second quarter of 2012. And as interest rates on the 10-year Treasury started moving up, the third quarter saw multifamily sales volume drop 20 percent from the third quarter a year ago.

However, as of the third quarter, apartment sales volume is still up 21 percent from 2012 year-to-date volume. When evaluating only individual apartment properties, sales in the second and third quarters are at the same level, at about $15 billion each, as in the comparable quarters of 2012.

Money chasing deals

According to investors in the multifamily property sector, there are still more buyers interested in multifamily properties than there are properties on the market.

“There’s just a lot more capital pursuing apartment property now than there was prior to the downturn,” says Kurt Zech, president of Kennedy Wilson Multifamily. “It is seen as a low volatility asset class, with good risk-adjusted returns. We saw that especially on the coastal markets between 2008 and 2010. Assets certainly lost value, but there was not nearly as much volatility as in some other product classes.”

In fact, multifamily asset values on the West Coast have now even exceeded the peak valuations seen in 2007, adds Zech.

Zech also says that he has seen cap rates rise only about 20 to 25 basis points in some markets even after interest rates on the 10-year Treasury started moving up in the summer, pointing to the demand for multifamily property.

Scott Melnick, a managing director in Jones Lang LaSalle’s MidAtlantic multifamily group, says that the Washington D.C. metro area has seen vibrant activity on the multifamily front. He sees demand from overseas buyers that like the stability and growth potential of Washington, as well as from institutional buyers such as pension funds and real estate investment trusts. Comparing the first three quarters of 2013 to the same period of 2012, Melnick says prices have either stayed constant or are still moving up, considering that people are more aggressive and there are fewer properties on the market.

Patrick Carroll, CEO of Atlanta-based Carroll Organization, says that he faced a lot of competition for deals in today’s competitive environment. “We bought about a billion dollars of multifamily this year, but we had to work hard and sort through more deals to find good ones,” he notes.

Major deals

One such deal is the Carroll Organization’s purchase of the 1,520-unit Arium Resort property in Hollywood, Fla., for $225 million, or about $148,000 per unit. Carroll liked the property, built in the 1990s, because it’s located on 88 acres, with multiple pools, in a supply-constrained market to which people have been moving, attracted by job growth. “These are solid brick constructions,” he says. “You could not replace that today. It really feels as though you are coming on to a resort when you come into the property. And with a property this big, you have a lot of resources available to provide amenities and services to your residents. We also like the value-add potential.”

To enhance value at the property, the company is upgrading and modernizing the units, their countertops, cabinets and bathrooms, as well as the floors. They are also playing up the resort theme on the exterior by upgrading the clubhouses and pools and creating a beach area by the pool. Carroll expects that he can hike up rents sufficiently to justify these investments.

Another big deal for 2013 is the $322 million purchase of the 914-unit Archstone Crystal Towers property in Arlington, Va., by Dweck Properties. As of early October, this was the second-largest completed multifamily property deal for the year, with the $360 million purchase of the 1,410-unit La Mirage property in San Diego, Calif., by Irvine Co. heading up the list.

The Archstone Crystal Towers property was part of the Archstone portfolio that Equity Residential bought from Lehman Brothers Holdings for about $8.96 billion, in the largest multifamily portfolio deal of 2013.

According to Jones Lang LaSalle’s Melnick, who brokered the Archstone Crystal Towers deal, this property, built in 1966, has a “grand, regal feel” to it. The units are large for the Washington D.C. market, with an average size of 1,100 square feet. Dweck has a very long-term holding horizon for the property and is renovating the units and upgrading common areas, according to Melnick.

Kennedy Wilson’s Zech is also engaged in making upgrades to units and common areas, in a bid to add value to the Esprit Marine Apartment Complex in Marina del Rey, Calif., a property that Kennedy Wilson purchased for about $225 million, in a joint venture with Capri Capital Partners. He sees the 437-unit property as “one of the premier assets in all of Southern California,” and one that would be difficult to replicate, considering that it is surrounded on three sides by water and has a luxury marina. Kennedy Wilson bought the property from Ring Group which, according to Zech, was looking to make a quiet sale, in an off-market deal. The Marina del Rey market is competitive, and there has been only “a modest lift in rents” at the property after Kennedy Wilson’s purchase.

Favored markets and financing

Kennedy Wilson continues to favor gateway cities on the West Coast, such as San Francisco and Los Angeles. Cap rates there on good quality assets in desirable submarkets go below 4.5 percent, according to Zech. He likes the East Bay submarket, since people tend to look there first as they get pushed out of San Francisco and the San Mateo area by rising rents.
Carroll Organization’s Carroll says, “If it is large enough for an NFL football team, that’s where institutional capital and a lot of people want to play.” This includes
cities such as Atlanta, Tampa, Miami, Houston, Dallas, Charlotte, Denver and Phoenix. Those he sees as out-of-favor markets include the ones that “really got hit hard either from manufacturing or outdated industries,” such as Ohio and Michigan.

As for financing of deals, Fannie Mae and Freddie Mac continue to be active, along with banks and insurance companies.

Looking to 2014

Multifamily investors expect that multifamily dealmaking activity will continue strong into 2014, with more interested buyers than there are sellers. A constraint for sellers is that they need properties available to buy before they decide to sell.

However, according to Zech, “It may be hard to replicate the transaction volumes that we have seen over the last two years, so maybe transaction volume comes down a bit.”

Top 10 Apartment Investment Sales Transactions of 2013

1. La Mirage
Location: San Diego
Buyer: Irvine Co.
Number of Units: 1,410
Property Price: $360 million

2. Archstone Crystal Towers
Location: Arlington, Va.
Buyer: Dweck Properties Ltd.
Number of Units: 914
Property Price: $322 million

3. Crystal House I & II
Location: Arlington, Va.
Buyer: Mack-Cali/UBS JV
Number of Units: 828 units
Property Price: $262 million

4. The Monterey
Location: New York
Buyer: Cammeby’s Int’l Group
Number of Units: 522
Property Price: $252 million

5. Esprit Marine Apartment Complex
Location: Marina del Rey, Calif.
Buyer: Kennedy Wilson/Capri Capital JV
Number of Units: 437
Property Price: $225 million

6. Arium Resort
Location: Hollywood, Fla.
Buyer: Carroll Organization/APH REIT JV
Number of Units: 1,520
Property Price: $225 million

7. Onterie Center
Location: Chicago
Buyer: LaSalle
Number of Units: 615
Property Price: $188 million

8. Mercedes House Phase 3
Location: New York
Buyer: Invesco RE
Number of Units: 162
Property Price: $170 million

9. 1225 Old Town
Location: Chicago
Buyer: Heitman
Number of Units: 250
Property Price: $157 million

10. Harbor Cove
Location: San Mateo, Calif.
Buyer: Acacia Capital Corp.
Number of Units: 400
Property Price: $138 million

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