Trophy Transactions Reflect a Healthy Investment Market

The largest multifamily transactions being completed today, from trophy to distressed, show an investment market that is running in high gear.

In the world of recent high-profile apartment transactions, the sale of One Superior Place in Chicago stands tall. The 809-unit trophy asset traded this past spring for a reported $320 million and, it is speculated, an extremely low cap rate.

The sale of the 52-story tower represents the second-largest apartment transaction in the history of the Chicago market, according to CB Richard Ellis.

The purchaser was Secaucus, N.J.-based Hartz Mountain Industries, a privately held company that  says it intends to build a portfolio of luxury rentals. Jeffrey R. Dunne, Christopher Leonard and Brian Schulz of CBRE’s New York Institutional Group represented One Superior Place Leasehold LLC and One Superior Place Fee LLC, the two entities controlled by Hartz Mountain Industries, in the transaction. The sellers were Brookfield Real Estate Financial Partners LLC, which owned the leasehold interest, and BLDG Management Corp., the asset’s fee interest owner.

The transaction “underscores the demand for highly visible trophy-quality assets with a multifamily component,” says John Jaeger, senior vice president at CBRE. “This was one of the top-located rental properties in the city.”

It was originally difficult to get takers for the property, which was put on the market in September 2010. The property was composed of separate leasehold and fee interests, and only the ground leasehold, which had 71 years remaining, was for sale. The site reverts to the fee owner after the leasehold expires.

Hartz Mountain Industries eventually stepped in to purchase the property in an off-market deal after the property was pulled from the market. CBRE helped negotiate a transaction in conjunction with Brookfield to secure the fee interest for Hartz, says CBRE’s Dunne. CBRE also represented the sellers: Brookfield, the leasehold owner, was represented by Jaeger, and BLDG, the fee owner, was represented by Jeff Fishman.

Anchored by Whole Foods and PNC on the ground floor, One Superior Place is located in the River North neighborhood of downtown Chicago,  close to the Magnificent Mile. Effective rents are $240 to $245 per square foot.

ChicagoRealEstateDaily.com reported a source saying that the cap rate on the original asking price of $260 million on the leasehold translates into 3.8 percent in the first year. Jaeger says cap rates for apartment assets in the Chicago market are now between 4 percent and 5 percent.

Jaeger emphasizes the asset was attractive as a long-term investment. Effective rent growth on One Superior Place this year was between 5 percent and 8 percent. Occupancy was 97 percent, with strong retention, he says. “We see the downtown market as continuing to be very active,” he says.

A life company beat Fannie Mae to provide the debt financing for the property. James Gunning and Donna Falzarano of CBRE Debt & Equity Finance secured the loan for Hartz. “We worked seamlessly as a team to complete the transaction,” says Dunne.

Secondary markets

Trophy properties in major metros are not the only large assets being traded. The market for multifamily in secondary markets is also seeing significant deals.

In December, AvalonBay Communities purchased the 776-unit Fox Run Apartments for $86.5 million from Angelo Gordon & Co. and Vantage Properties. Angelo Gordon and Vantage Properties had previously acquired the Plainsboro, N.J. asset in July 2009—during the depths of the recession—for $70.5 million, in a deal brokered by HFF (Holliday Fenoglio Fowler LP), says Jose Cruz, senior managing director at HFF.

In the space of 17 months, the renovated asset appreciated in value by $16 million. The most current sale price of $86.5 million, or $111,000 per unit, represents one of the highest prices per unit in the market, Cruz says.

“The transaction provides a great example of the market recovery,” says Cruz. “In one-and-a-half-years, the price had improved that dramatically.”

Cruz and Andrew Scandalios, HFF senior managing director, and HFF Directors Jeffrey Julien and Kevin O’Hearn, marketed the property on behalf of Angelo Gordon and Vantage Properties.

Fox Run Apartments is located in Princeton, N.J. The property is located on more than 46 acres and has 58 two-story buildings. One- and two-bedroom units average 713 square feet each, and rents are currently about $1.45 per square foot.

There were multiple rounds of bidding, but because the asset is Class B, the interested parties were mostly private investors rather than major institutions, Cruz says. “It is very difficult to build in many towns in New Jersey. … Investors felt this was really an opportunity to come in and pick up a big deal.”

The general market cap rate for Class B properties is about 6 percent, says Cruz. “This is a nice opportunity for AvalonBay to obtain a cash-yielding property in the market.” Moreover, the renovation is not completed, and there is further [potential] upside in the property.

HFF’s Cruz and Director John Taylor secured a $10 million, fixed-rate securitized acquisition loan through PNC Real Estate on behalf of AvalonBay.

As a reflection of the state of the current market, some of the largest transactions involve the acquisition of distressed properties—located in secondary or tertiary markets.

Square Mile Capital, The Kushner Cos. and Apollo Property Management picked up a distressed portfolio of 4,681 apartment units in the spring. The Wall Street Journal reported the sale price as $72 million, about half the $172 million in debt and equity that was originally sunk into the property when the existing owner acquired the portfolio in 2006 and 2007.

What is interesting about the transaction includes the fact that the buyers would commonly be regarded as mainstream, institutional-type, investors that commonly adhere to the top-tier markets: Kushner has been focused on the Manhattan market and Square Mile Capital on the major markets.

“Big institutional investors are very eager to get into multifamily. They now have to look outside the first-tier markets for more attractive pricing,” says Jeffrey W. Baker, executive managing director of Savills LLC. “To see Square Mile and Kushner buy a large portfolio in the Midwest—that would not have happened a year ago.”

Opportunistic and/or value-added multifamily investments, in particular, are becoming more difficult to find in the major markets, adds Baker.

The portfolio, which consists of 1970s and 1980s vintage garden apartments and some urban midrises, includes: Leland Point, in Pittsburgh, 1057 units; Cedarwood Village and Dorchester Village, Cleveland, 950 units; Park Valley, Ferncrest, Renata and Bavarian Woods, Cincinnati, 803 units; Abbey Run, Georgetown Village, Miracle Manor, Sunnydale and Hunters Ridge, Toledo, Ohio, 1099 units; and Coppertree, Speedway, Ind., 772 units. At closing, management of the properties was assumed by Apollo Property Management.

Savills acted as the advisor in the sale, as well as financial advisor to the previous borrowers and Apollo Property Management in the workout of the existing portfolio financing. The previous owner had upgraded the properties, but the overleveraged assets fell into severe distress in the late-2000s as occupancy plummeted to under 75 percent.

The new owners plan to bring occupancy levels up to the average market rate of more than 90 percent. With limited new supply and solid demand, the Midwest market is, in fact, more stable than many investors assume, Baker says. There have been no dramatic swings in rents or asset values despite the recession, he says.

Savills helped to work with the lender and borrower to modify the terms of the existing loans and to bring in Kushner and Square Mile Capital to provide the capital infusion. The original loan had defaulted, and the portfolio required additional equity to lower the level of the debt to supportable levels and to complete required renovations.

The transaction was also worthwhile for the existing lender, a major life company—to the extent that the lender remained in the transaction and provided financing for the acquisition by the new owners. According to Baker, “The lenders were willing to recommit to the asset based on the quality of the new sponsorship and the amount of capital invested by the new sponsorship.”

To comment on this story, email Keat Foong at [email protected].