Multifamily properties continue to be sought after by investors as the lingering effects of the housing downturn mean that homeownership rates remain subdued, and favorable demographics are also causing a hike in demand for rentals. According to Matthew Lawton, a Chicago-based executive managing director for HFF, investors are drawn to the rising rents in the sector that are at all-time highs as a result of these factors. “The other thing that’s driving pricing in the multifamily side is that on a risk-adjusted basis, it is a very compelling return,” he said. While the pace of dealmaking is slowing down as the business cycle matures, Real Capital Analytics reports that apartment sales volume was still up 26 percent year-to-date as of this September, compared to September 2014.
Stuyvesant Town: A blockbuster
The pace picked up somewhat in October, with the announcement of the biggest multifamily deal of 2015 so far, the sale of New York’s Stuyvesant Town/Peter Cooper Village development for $5.3 billion. The property last sold in 2006, at the height of the real estate boom, for $5.4 billion.
Nadeem Meghji, co-head of real estate acquisitions for Blackstone, which bought the property together with Canadian pension fund Ivanhoe Cambridge, sees the property, which has about 11,200 units, as an irreplaceable piece of real estate.
Meghji noted, “It is the largest apartment complex in the United States, in one of the strongest markets, if not the strongest. We are big on New York City — to us, this has always been a property that we have sought to acquire.”
Blackstone expects a long holding period — as per the terms of the deal, it has agreed to keep 5,000 units affordable for the next 20 years. In return, it has garnered certain tax benefits, as well as other concessions, from New York City. The buyers have also agreed that they will not undertake condominium conversions at the property or build additional towers there.
Even though the property’s cash flow has doubled since 2006, the acquisition price remains at the same level. Jim Costello, a Boston-based senior vice president with RCA, said, “If it had worked out the way they had hoped [in 2006], with push in income, then perhaps that pricing would have made sense. Sometimes deals go the direction you don’t want, so things are beyond your control. The financial crisis happened.” Considering that Blackstone’s strategy is more focused on managing the property for long-term returns than on a thrust to quickly drive up income at the property, Costello sees the deal as a sign of a “healthy, functioning market.”
While New York City remains a favored market for investors, with New York properties appearing in several of the largest deals, other large U.S. cities are also a draw. For instance, another major deal involves the sale of the 111 West Wacker property in Chicago for a little more than $328 million. Heitman, the real estate investor and manager that bought the 504-unit property, saw “an exceptionally high quality asset in a great location and, given the trend to urbanization, felt it would have lasting appeal for years to come.”
In another major deal, Heitman also acquired the newly built Premier on Pine property in downtown Seattle for a little more than $241 million. HFF’s Lawton was a broker on that deal, representing Holland Partner Group, a developer that sold the 386-unit property even before it was fully leased. According to Lawton, the deal “set the new high watermark for Seattle on a price-per-unit and price-per-square-foot basis.” Heitman assumed a construction-to-permanent loan on the property to finance the acquisition.
Buyers of trophy assets generally tend to be lower-leverage borrowers, typically looking for 40 to 60 percent financing. Financing continues to be available from all manner of lenders.
The government-sponsored entities are leading the pack, accounting for 49 percent of the lending activity in the first half of 2015, according to RCA. Life insurance companies are also active lenders, accounting for 6 percent of the first half originations, a regional and local bank lending represented 14 percent of the first half origination activity. Commercial mortgage-backed securities lending made up another 7 percent of the activity.
As for multifamily cap rates, RCA reported they averaged 5.8 percent in September, a decline of 30 basis points over the year. Blackstone’s Meghji, said of the trend on cap rates, “I wouldn’t peg it on cap rate compression. I would say that they are pricing in value appreciation. I would peg it on cash flow growth.”
Multifamily Will Continue Growth
With multifamily fundamentals continuing strong, investors will continue to favor this sector in 2016, despite construction activity. Even if interest rates start going up, they would still be low compared to historical standards.
At any rate, foreign capital still continues to be drawn to U.S. multifamily properties. According to RCA’s Costello, “It seems there is a lot of joint venture activity with foreign buyers. Perhaps some of the fund managers that are buyers have foreign capital as well. Even with the low cap rates, this sector has stable yield and investors are hungry for that worldwide at the moment.”