International Appeal
Much as rising interest rates are encouraging institutional investors, an attractive exchange rate has refocused overseas dollars onto U.S. markets. On the international scene, capital is flowing from locales such as South America, Australia, Europe, and Asia. “This is an asset class that foreign investors typically don’t participate in,” Real Capital Analytics’ White says, “so it’s yet another good indicator of the strength of the multifamily sector.”
Like international buyers, institutional investors who have been frustrated for the past few years are making a return to the buyer scene. In 2003 (and much of 2004) institutions and REITs were haunted by the drastically leveraged private buyer who could consistently outbid them. In 2005, they were crowded out by condo converters operating on a similar low-rate footing.
ING Clarion is one example of how far some investors have gone to participate productively in the multifamily sector: In September, the company, in a joint venture with Lehman Brothers, bought an entire REIT–Gables Residential Trust–for approximately $2.8 billion because it was easier than buying properties individually.
Just a hint of rising rates, however, is now giving institutions and REITs the foothold they’ve needed to begin to reenter the commercial real estate investment game in a more assertive manner. Markets seeing the most activity include Florida, Seattle, San Francisco, Los Angeles and New York.
“As rates continue to rise in 2006, we’ll see capital remain in great supply but grow more from the un-leveraged and low-leveraged buyers,” says White. He adds that these sources have significant investment dollars and are eager to begin supplanting the leveraged investor and place more money with less competition.
In terms of both institutional and international capital, the first signs of change typically appear in coastal markets: Florida, Seattle, San Francisco, Los Angeles, and New York.
“Seattle has attracted a nice diversity of capital from players such as Equity Residential, Essex, and Archstone-Smith,” says White. In July, Archstone-Smith entered the downtown San Francisco market, purchasing the mixed-use, 44-unit Fox Plaza high-rise for $147.5 million.
In October, New York-based REIT Stellar Management completed another major transaction in San Francisco: The company purchased a 3,221-unit complex near Lake Merced for more than $666 million with no indication of plans to convert to condominiums.
In Florida, major players are entrepreneurial private capital players, some in joint ventures with institutions. With their sights set on conversion, New York-based GE Commercial Finance Real Estate and Boca Raton-based Stoltz Cos. recently entered into a $123 million joint venture to acquire the 450-unit Coral Harbor Apartments in Boca Raton. And Sunvest Communities, U.S.A., has just launched a 1,020 unit portfolio of three Orlando complexes for conversion that may be sold out within 60 days.
Sunvest has recently closed on more than 1,600 units for more than $242 million in the state. Margolias Realty Group of Atlanta, MCZ Development/Centrum Properties, Colonial Properties Trust, and Orlando, Fla.-based Tarragon South all just closed deals in Florida as well.
While New York and its surrounding markets will always have a solid presence of institutional capital roaming the landscape, REITs such as Alexandria, Va.-based AvalonBay Communities are showing signs of stepping up their investment and construction activity. Of the company’s 150 apartment communities in the United States, five are on Long Island, six are in the Westchester area, and two are in New York City. Avalon Chrystie Place, a 361-unit, newly built luxury rental property, opened in Manhattan earlier this year and is already at more than 80 percent occupancy. Full occupancy is expected soon.
In 2006 and beyond, international and institutional capital is expected to flow into markets further inland in a much more aggressive way as well. The result will be increased buyer competition and more financial support for new development.