Top Deals of 2011

The apartment market returns to its norm with large investment sales transactions.

Meet the nation’s largest investment sales transaction of 2011: the $443 million sale of Rivergate in New York to UDR.

UDR’s purchase of the 706-unit Rivergate community in Manhattan’s Murray Hill in July ranked as the nation’s biggest apartment deal of the year, according to data from Real Capital Analytics (RCA). The REIT bought the property from Zucker Organization, which had developed the community in 1985. The off-market transaction was brokered by Georgia Malone & Co., which represented UDR and brought together buyer and seller.

Meanwhile, another of UDR’s Manhattan purchase slipped easily into the number-two spot in RCA’s ranking of this year’s top deals: UDR’s $325 million buy of the 507-unit 95 Wall St. from The Moinian Group. Located in the Financial District, the property was originally the corporate headquarters of JP Morgan and was converted into condo-quality space in 2008.

UDR says it is transforming its portfolio and targeting markets with the potential for strong rental growth. “UDR has obviously made the strategic decision to invest in the Manhattan market, not unlike other apartment REITs,” observes Dan Fasulo, managing director at RCA. “Many [REITs] are reallocating capital to the market with the best long-term growth prospects, and UDR is one of the last nationwide REITs to get a foothold in New York. They have acquired three major assets in a short period of time. Many investors have identified global cities in the U.S.—New York being the top—as places where rents will increase the most over the next few years.”

Winning notice as the third-biggest investment sales transaction of the year is the $320 million purchase, brokered by CBRE, of One Superior Place in Chicago by Secaucus, N.J.-based Hartz Mountain Industries. The sellers were Brookfield Real Estate Financial Partners LLC and BLDG Management Corp. As it turns out, Hartz is a privately held company, and it has said that it intends to build a portfolio of luxury rentals.

In the fourth-largest multifamily investment sales transaction of the year, JP Morgan Asset Management purchased Liberty Towers in Jersey City, N.J., from Olnick Fisher Development Associates for $280 million. The transaction was brokered by BlueGate Partners LLC. Coming in as the fifth-largest multifamily transaction of the year is another UDR purchase—in fact, its first acquisition in the Manhattan market—the $260.8 million takeover of 10 Hanover Square, which was being unloaded by the Witkoff Group. Like 95 Wall Street, the 493-unit, 23-story building is former office space located in the Financial District. Eastdil Secured arranged the sale.

Although the price tag is high, these could be lucrative deals. Tom Toomey, UDR president and CEO, explains the desirability of New York City, and specifically Manhattan, as a commercial real estate investment market. The Manhattan market has a large pool of renters as more than 70 percent of residents rent, and a particularly high concentration of the 20- to 35-year-old renter cohort. Moreover, the island has a highly educated populace, and the unemployment rate for college graduates is less than half that of the national average. UDR projects further upside through improved management of all of its recently acquired communities, including Rivergate, 10 Hanover Square, 21 Chelsea and 95 Wall. The company anticipates that the yield on Rivergate following its planned $60 million redevelopment will be 5 percent to 6 percent.

These apartment investment sales are indicative of a “normalized market,” in which investors are comfortable enough again to purchase massive assets, Fasulo indicates. “We had a period in 2005 to 2007 when we saw massive apartment complexes sell for [billions of dollars]. We have not seen any of the mega sales recently until now. These larger transactions are reflective of healthier markets. We have come a long way since 2009,” he says.

Indeed, the large deals market is alive and well now. There has been an increase in larger deals coming to the market beginning in the summer, observes Peter Donovan, senior managing director of Capital Markets, Multi-Housing Group at CBRE. The reason may be that large institutional holders are viewing this as a good time to dispose of some of their inventory.

Marcus & Millichap has seen the biggest growth in transactions in large properties of more than $20 million, observes Hessam Nadji, managing director, Research and Advisory Services at Marcus & Millichap Real Estate Investment Services. The trend is driven by the surplus of institutional capital seeking transactions.

Though there are a greater amount of large assets coming onto the market, Donovan agrees that sales that are greater than $100 million are still relatively rare occurrences. These transactions have to be in urban settings and in relatively high-cost markets, he notes.

In terms of large portfolio deals, HFF recently brokered a $241.5 million sale of six properties by AIG Global Investment Group to Vantage Properties LLC and Angelo Gordon & Co. The properties, totaling 2,200 units, were located in New Jersey in Plainsboro, Long Branch, Neptune, Matawan and South River. The properties were Class B garden apartments, built between 1960 and 1981.

“This deal provided the opportunity for Angelo Gordon and Vantage to break into the New Jersey multifamily market in a pretty big way,” comments Jose Cruz, HFF senior managing director, the broker on the deal. “It is rare to have the opportunity to acquire a portfolio this size in one fell swoop.” AIG was selling, as it saw an opportunity to take advantage of a relatively strong multifamily market, says Cruz. There were over 24 bids, and the asset was on the market for about five weeks, he adds.

The demand for large deals is “almost insatiable,” but the supply of assets remains limited, comments Cruz. “That is what has driven the aggressive pricing.” Cap rates continue to fall in the top-tier markets, notes Marcus & Millichap’s Nadji. In the true core primary markets, such as New York, Washington, D.C., Boston, San Francisco, Los Angeles and San Diego, cap rates are 4 percent to 4.5 percent for Class A properties and 5 percent to 5.6 percent for Class B properties, Nadji says.

There is even some cap rate compression beginning among Class A products in secondary markets, such as Denver, Dallas and parts of Florida, but none at all in the tertiary locations, Nadji reports. More Class B products are coming onto the market, “though we would like to see more,” adds Donovan.

One transaction that Marcus & Millichap’s Institutional Property Advisors (IPA) has brokered that provides an example of a deal in a gateway city on the coveted West Coast is the transfer of The Millennium Warner Center in Los Angeles. IPA, a boutique brokerage targeted to serving institutional and major private investors, negotiated the sale of the asset for $132,850,000. The 438-unit, 415,040-square-foot property is newly constructed. IPA represented the seller, Warner Center Apartments LP, and the buyer was another REIT-related entity, Wesco LLP, an Essex Property Trust-sponsored joint venture.

As far as the largest transactions, Donovan observes possibly fewer bidders when the products come to market. However, the reason could be that there are more larger deals to look at rather than a pullback from investors, he surmises.

The series of negative market events this past summer—the debt ceiling controversy, passage of the federal spending cuts, S&P downgrade of the U.S. debt rating, continuing negative developments in the European debt crisis and the stock market plunge—may not have materially caused investors to pull back from multifamily investments.

“In August, we may have seen a few deals delayed, but other buyers stepped right in. Since then, the market has come back to normal. There were buyers who took advantage of others hesitating because the market is so competitive,” says Nadji. Investors will examine assumptions on rent growth more closely, but they are not sitting on the sidelines as a result of the market volatility in August, adds Donovan.

Investors are committed to the multifamily market for its long-term dynamics, says Donovan. For example, they see there is a lack of supply to meet the demand from the prime renter age group and that homeownership is “dropping like a rock.” Further, uncertainty and volatility in other investment areas, argues Nadji, may result in apartments becoming even more desirable as an investment vehicle.

Top Apartment Sales of 2011

1. Rivergate

Location: New York
Sale Price: $443,000,000
No. Units: 706
Price Per Unit: $627,479
Buyer: UDR Inc.
Seller: Zucker Organization
Broker: Georgia Malone & Co.

2. 95 Wall Street

Location: New York
Sale Price: $325,000,000
No. Units: 507
Price Per Unit: $641,026
Buyer: UDR Inc.
Seller: Moinian Group
Broker: Eastdil Secured

3. One Superior Place

Location: Chicago
Sale Price: $320,000,000
No. Units: 809
Price Per Unit: $395,550
Buyer: Hartz Mountain Industries
Seller: Brookfield Asset
Broker: CB Richard Ellis

4. Liberty Towers

Location: Jersey City, N.J.
Sale Price: $280,000,000
No. Units: 648
Price Per Unit: $432,099
Buyer: JP Morgan Asset
Seller: Olnick Fisher
Development Associates JV
Northwestern Mutual Life
Broker: Bluegate Partners LLC

5. 10 Hanover Square

Location: New York
Sale Price: $260,800,000
No. Units: 493
Price Per Unit: $529,006
Buyer: UDR Inc.
Seller: Witkoff Group
Broker: Eastdil Secured

Ranking is current thru Oct. 17, 2011. Source: Real Capital Analytics