By Michael Ratliff, Associate Editor
It is easy to see that 2012 was truly the year of multifamily redemption. Property values have surpassed all-time highs in certain major markets, and vacancy is expected to reach all-time lows in many instances. It is no surprise then that everyone is vying for a piece of the action.
“Multifamily is the only property sector that is seeing nationwide recovery,” says Dan Fasulo, managing director of Real Capital Analytics. “Through mid-year we recorded just under $30 billion worth of multifamily sales activity. That was up 23 percent versus the same period in 2011.”
Fasulo points out that the percent increase carried over to the number of properties that traded as well, meaning that the volume increase was not the result of large trophy assets tipping the scale. Transactions are being fueled in part by historically low interest rates, with buyers taking advantage of 10-year fixed-rate loans at or below 4 percent. This, along with strong market fundamentals and a growing rentership, has contributed to a rise in property prices.
“The lower mortgage rates have allowed people to pay a little more, because their debt service coverage ratios are a little lower,” Fasulo adds. “Though it helps the momentum we have already seen continue, we are starting to see some evidence of plateauing in the larger cities, where many feel that everything is fully priced.”
Looking at the current apartment property prices in some of the largest metros compared to peak values in December 2007 certainly hammers home Fasulo’s point. Boston, San Francisco, Seattle, Manhattan, Chicago and even Denver have all surpassed their 2007 highs for average market prices.
“In the top markets, the only way to bid on a property is to bet on rental growth,” Fasulo says. “If you can’t factor in big rent growth, you are just not going to win.”
And as prices have surged, cap rates in those premier markets have done the opposite. This will inevitably lead investors and capital into secondary markets or value-add/development plays in primary markets. Fasulo says that many investors have already crossed San Francisco and Manhattan off their lists.
But when it comes to demand for high-end apartments, Manhattan still reigns king and was home to the greatest sales volume of any metro market ($5.3 billion through August) as well as the second most expensive single asset transaction this year as of October 1. That deal occurred in June, when Equity Residential picked up The Beatrice, a 2010-built 301-unit asset that sits atop a 24-story hotel in Manhattan’s prestigious Chelsea neighborhood, for $280 million. Rents range from $7 to $10 per foot depending on the view.
“But there is not a bad view in that building,” says Alan George, chief investment officer and executive vice president at Equity Residential. “It is truly an astounding asset, and I honestly think that it is the nicest rental building in Manhattan in many respects.”
The purchase, which was a direct deal, sets up the company for a long-term hold in which they will focus on refining the operating process and maximizing rents. This process is a bit different from the REIT’s plan for The Irene, a 1966-built 500-unit asset located in Chevy Chase, Md., which was the fourth largest acquisition in 2012 as of October 1 at approximately $209.3 million. Equity Residential picked up the asset in April from Irene Pollin, the building’s namesake and wife of the late former Washington Wizards owner and developer Abe Pollin.
“There is an enormous opportunity for a value-add play here,” George says. “This building has never been rehabbed and we are really rolling up our sleeves and digging in here with some very exciting capital improvement plans. So it is different from The Beatrice, but really the same in a way. When The Irene was originally built, it was The Beatrice, and we are going to make it back into that again.”
George points out that the REIT is especially pleased to enter the Chevy Chase market after spending several years looking for a way into what is one of the highest income areas of Washington, D.C. The notion is testament to how difficult it currently is to score those trophy communities.
“While it varies from market to market, I would certainly say that there has been more demand for Class A core assets in the past year than there has been supply—we have certainly seen yields fall,” George says.
He predicts that demand will continue to outpace supply throughout 2013, though things might even out a bit as the development pipeline begins to reach a normalized delivery rate towards 2016. Equity Residential plans to hold both assets long term (roughly 20 to 30 years according to George), which falls in line with the REIT’s current strategic plan of exiting non-core markets and redeploying that capital into core infill assets in core locations.
Home Properties Inc., a REIT that specializes in Class B and C assets in suburban areas of primary markets, has recently executed an exit strategy from secondary markets. While it is easier to get into secondary or tertiary markets, it is significantly harder to exit due to a smaller pool of players. The company landed on the list of most expensive buys with the $186 million purchase of Howard Crossing, a 1,350 unit asset located in Ellicott City, Md.—a Baltimore suburb. Properties in Baltimore are trading at 86 percent of their peak 2007 value, and as a result cap rates are high at an average of 7.1 percent as of August.
“We have been in Baltimore since 1998, and it has been one of our better performing markets,” says David Gardner, chief financial officer of Home Properties. “Recently, it has been one of our best performers.”
Gardner adds that the Baltimore area had the largest rent growth of any of the company’s markets in 2010, and in 2011, it had the second best revenue growth. In 2012, it is in the middle of the path with a 4.6 percent growth in revenue over the past six months.
He attributes national apartment strength in part to a decline in the home ownership rate, which peaked at 69.2 percent in 2004 and is now at 65.4 percent, closer to the national norm which averaged 64.3 percent from 1960 to 2000.
“So people are leaving homes and there are just not enough new apartments for them to go to,” Gardner adds. “I would also say that the recession kept people in place. They didn’t move to different regions, and in some cases they didn’t even move down the street.”
It is no surprise then that annual renter turnover is as low as Home Properties has ever seen at 38 percent. As far as what the future holds, Gardner says that the REIT has a rough plan to complete $300 million in purchases in 2013, though that number will be balanced with sales in the $200 to $250 million range.
“I think we see the opportunities to sell for pretty good cap rates, so we are going to take advantage of that,” he adds.
But while it is certainly a terrific time to buy, some sellers—especially those who are not looking to recycle capital into real estate—are still a bit hesitant. Take what Fasulo is being told by his broker clients as a closing thought.
“The sellers are saying, ‘OK, if I sell this, what can I do with the money?” he says. “That is a good question. Are you going to put it in government bonds which are going to be inflated? Or stocks, which have been very volatile? The prices just haven’t gotten high enough to bring out all the discretionary sellers.”
Top Apartment Sales of 2012
Location: Ewa Beach, Hawaii
Sale Price: $311 million
No. Units: 1,461
Price Per Unit: $212,868
Buyer: Carmel Partners
Seller: Cirrus Asset Management Inc.
Broker: Eastdil Secured
Location: New York
Sale Price: $280 million
No. Units: 310
Price Per Unit: $930,233
Buyer: Equity Residential
Seller: JD Carlisle Development Corp
JV DLJ Real Estate Capital Partners
Broker: Prince Realty Advisors
Location: New York
Sale Price: $216 million
No. Units: 1,802
Price Per Unit: $119,867
Buyer: L&M Development Partners JV
Seller: Vantage Properties JV AREA
Location: Chevy Chase, Md.
Sale Price: $209 million
No. Units: 500
Price Per Unit: $418,659
Buyer: Equity Residential
Seller: Irene Pollin
Location: Bellport, N.Y.
Sale Price: $196 million
No. Units: 795
Price Per Unit: $246,541
Seller: Pantzer Properties
Location: Melrose, Ma.
Sale Price: $188 million
No. Units: 550
Price Per Unit: $341,933
Seller: Pembroke Real Estate
Broker: CBRE Group Inc.
Location: Ellicott City, Md.
Sale Price: $186 million
No. Units: 1,350
Price Per Unit: $137,778
Buyer: Home Properties
Seller: Hirschfeld Homes JV Starwood
Broker: CBRE Group Inc.
Location: Hyattsville, Md.
Sale Price: $182 million
No. Units: 1,242
Price Per Unit: $146,538
Buyer: Harbor Group International
Seller: Hunt Companies Inc.
Broker: Eastdil Secured
Location: Arlington, Va.
Sale Price: $175 million
No. Units: 442
Price Per Unit: $395,928
Buyer: Dweck Properties Ltd.
Seller: Tishman Speyer JV Lehman Brothers
Holdings Inc., JV Bank of America
Location: Santa Ana, Calif.
Sale Price: $170 million
No. Units: 349
Price Per Unit: $487,106
Buyer: Essex Property Trust
Seller: (Partner buy out)
Ranking is current through Oct. 1, 2012
Source: Real Capital Analytics