Multifamily Surges Back!

By Randyl Drummer

September 8, 2010

Multifamily property in major metro markets remains the asset of choice for many commercial real estate investors, with momentum fueled by a number of large late-summer sales transactions following a solid first half of 2010.

Public and private REITs have landed the largest deals of late, but private equity, pension funds, insurance companies, owner-developers and even private

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individuals are all getting into the action for both core and distressed multifamily projects in large metros around the country, according to CoStar Group sales data.

“Investors are continuing to hunt down deals in the apartment space,” said CoStar real estate economist Dan Egan, citing plans announced this week by apartment real estate investment trust UDR Inc. (NYSE: UDR) to acquire six apartment communities in Massachusetts, Southern California and Baltimore for $455.1 million in one of the largest portfolio deals of the year.

UDR’s purchase includes the $157.5 million purchase of the 583-unit Marina Pointe in Los Angeles’s posh Marina del Rey, and the $98 million purchase of 160-unit Garrison Square at the intersection of Boston’s Back Bay and South Hill neighborhoods at a stellar $612,000 per unit.

“Those are all really nice assets, and it speaks volumes about the sentiment of investors with regard to apartments,” Egan said. “We haven’t seen that kind of trading and confidence in the office market.”

The UDR sale includes three communities recently developed by The Hanover Co. and acquired at a substantial discount to their cost, including the 266-home1818 Platinum Triangle in Anaheim, acquired for $70.5 million, or $266,000 per unit; Ridge at Blue Hills in Braintree, MA, 186 units, $40 million, or $215,000 per unit; and the 180-unit Domain Brewers Hill in Baltimore, $46 million, or $255,600 per unit.

Monthly rental income for all six communities acquired by the REIT averages just under $2,000 per occupied unit. UDR said it will finance the 1,614-unit portfolio with cash, funds from its credit facility and the assumption of $92 million of first mortgages on the Marina del Rey and Braintree properties.

UDR’s entry into Boston “exemplifies our strategy of owning [properties] in markets characterized by low home affordability with superior growth prospects,” said Tom Toomey, president and chief executive officer. “Collectively, these acquisitions will further enhance the overall quality of our portfolio as measured by average monthly income per occupied home, age and home size,” Toomey said.

Other significant apartment property and portfolio sales of more than $100 million over the last several weeks include the following:

  • Grubb & Ellis Apartment REIT agreed to acquire nine multifamily properties totaling 2,676 units in three states from Oakton, VA-based MR Holdings LLC, as well as all of the assets of Mission Residential Management LLC, in a $182 million deal.
  • Cornerstone Real Estate Advisers LLC and Kettler sold the Metropolitan at Pentagon City, a 325-unit multifamily complex at 901 S. 15th St. in Arlington, VA, to Invesco for $125 million.
  • Eagle Rock Management LLC acquired seven apartment communities totaling 1,666 units in Carle Place, Hicksville, Mineola, Nesconset and Woodbury in the Long Island market’s largest multifamily transaction this year. Fairhaven Properties Inc. sold the properties in an off-market deal for $229.75 million.

Mid-America Apartment Communities Inc. (NYSE: MAA) continued its multifamily buying spree, making at least four acquisitions over the last month. Mid America acquired the 313-unit Times Square at Craig Ranch near Dallas from the development loan lender for $31.25 million. The Memphis-based REIT in August also announced the acquisition of the Verandas at Sam Ridley, a 336-unit gated apartment community in the Nashville area, for $32 million; the Hue, a 208-unit apartment community in the Raleigh, NC area, acquired from the construction lender for $33.6 million and the 270-unit La Valencia at Starwood in the Dallas area for an undisclosed price. On Sept. 2, Mid-America completed the purchase of The Venue at Stonebridge Ranch, a 250-unit apartment community in McKinney, for an undisclosed price.

While the super-heated Washington, D.C. market had been the undisputed capital for multifamily investment earlier in the year, Boston and San Francisco are among a number of metros cited by CoStar economists as strong prospects for investors seeking to catch the next wave of value appreciation.

“Investors seeking to capitalize on the recovery in [Washington] D.C. have likely missed the boat by a few quarters, and as capital is beginning to fan out across the country, it’s time for opportunistic investors to shift their attention elsewhere,” Egan said.

CoStar studies show that sales transaction dollar volumes picked up significantly in multifamily, among other property types, during second-quarter 2010. While many investors are swooping in for core and core-plus assets, about 28% of all multifamily sales show signs of distress, eclipsed only by hotels at 35%, according to the CoStar Commercial Repeat-Sale Indices (CCRSI).

Meanwhile, an analysis of investment conditions by the Real Estate Research Corp. found that investors rated institutional-quality apartment assets a full point higher on a scale of 1 to 10 during second quarter 2010 from the previous quarter. The rating for apartment sector investment conditions increased from 6.1 in the first quarter to 7.1, the highest among the property types surveyed by RERC and the strongest multifamily rating in the survey since second-quarter 2001’s 7.4.

“I wouldn’t say the apartment sector is ‘recession-proof,’ but it is the sector that is regarded as most safe and also seems to garner the most demand when times are tough, whether it is in this recession or the last one,” said RERC President Ken Riggs.

CoStar’s Egan found appealing markets for opportunistic and value-add investors in looking at the increase in sales transaction dollar volume between 2009 and 2010, along with forecasted changes in property values between fourth-quarter 2010 and fourth-quarter 2014. Value appreciation of 25% and up is expected in Florida, Arizona and Texas, along with well-established coastal metros in the Northeast and the West. Investors may have to look hard, however.

“Since capital has not yet found its way to markets such as San Jose, Seattle, and Boston in 2010, investors would be wise to scour them for attractive pricing, as they will be rewarded with impressive value growth over the forecast,” Egan said. However, with a bright recovery pending in those markets, most current owners don’t want to sell at the bottom of the market unless they absolutely have to, Egan said.

Stepped-up sales activity and tighter bid-ask price gaps, however, suggest that opportunities may be more abundant in Phoenix, San Francisco, Atlanta, Orlando, Tampa and Dallas-Fort Worth. Growth markets such as Phoenix and Orlando in particular have seen transactions pick up in the first half and should also see above-average recovery in values over the next four years, Egan said.

That said, “if you’re looking to invest in these markets, you should sharpen your pencils quickly; values in many of these markets are recovering rapidly,” Egan noted.

The bullishness of investors is driven by the ongoing belief that home ownership and demographic trends will continue to drive demand for apartments and keep fundamentals strong. Lower average capitalization rates suggest that income growth potential is relatively high for multifamily versus office, industrial, regional mall and hotels, RERC’s Riggs said.

“This, along with the relatively low risk associated with this sector as compared to other property sectors, makes it a particularly attractive investment,” he said.

In other significant transactions:

  • A joint venture of The Prado Group and Angelo, Gordon & Co. this week acquired four buildings in San Francisco from a holding company of lender UBS in a distressed debt deal for $30.3 million The assets were part of a 51-building portfolio owned by Lembi Group and taken back by UBS in a deed-in-lieu of foreclosure transaction early last year. The properties totaling 250 units in Lower Nob Hill/Union Square, Hayes Valley, Lower Polk, and the Civic Center neighborhoods received extensive upgrades and renovation under prior ownership and are 97% occupied. “They are quality housing properties in well-located San Francisco submarkets,” said Dan Safier, president of San Francisco-based Prado Group. “The properties fit squarely within our strategy to acquire and develop residential and mixed-use properties in vibrant, supply-constrained, 24/7 markets like San Francisco.”
  • Private-equity firm The Bascom Group, LLC acquired The Retreat at Canyon Springs Apartments, a 32-acre, 360-unit luxury Class A property in San Antonio constructed in 2001, in a deal that closed Aug. 26. Bascom has been actively buying distressed multifamily properties in Arizona, California, Colorado, Georgia, Hawaii, Nevada, Texas, Utah and Washington. Terms of the deal were not disclosed.
  • Jackson Square Properties purchased the 200-unit multifamily property at 3185 Garrity Way in Richmond, CA, from Prudential Real Estate Investors for $32.76 million.
  • The Shoptaw Group of Atlanta sold the 336-unit Brassfield Park apartment complex in Greensboro, NC, to Bell Partners for $22.8 million.
  • New York-based REIT Home Properties Inc. purchased the Annapolis Roads Apartments at 1101 Lake Heron Drive in Annapolis, MD, from Dubin Development Co. for $32.5 million.
  • Chicago-based Heitman America Real Estate Trust purchased the Addison Park multifamily complex in Charlotte, NC, for $33.3 million.
  • Waterton Associates acquired the Brier Creek Apartments in Raleigh, NC, from Flaherty & Collins Properties for $28.3 million.
  • Hamilton Zanze & Co. of California acquired a seven-property, 1,566-unit multifamily portfolio in Arizona out of receivership for $46.5 million, or about $29,700 average per unit. Six of the properties are located in Tucson and one is in Sierra Vista.
  • BRE Properties Inc. purchased the Fountains at River Oaks in San Jose, CA, from FRG Fountains LLC for $50.3 million. BRE assumed an existing secured mortgage loan of $32.5 million for the acquisition.
  • Also in Silicon Valley, a private owner sold the Commons Apartments in Campbell, CA, to Essex Property Trust for $42.5 million.
  • Cornerstone Real Estate Advisors acquired The Highlands at Westwood, located at 7101 Cenrose Circle in Westwood, NJ, for $59.5 million, or about $278,000 per unit.


One Response to “Multifamily Surges Back!”
  1. Bobby T says:

    Great info. It’ll be interesting to see if this trend continues.

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