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Buyers Getting Picky Over Big Apartment Offerings

"Portfolio Premiums" Harder to Come By
June 14, 2018
Pictured: Wesley Village in Charlotte, NC, one of 11 communities HFF sold in a 3,039-unit portfolio to eight different buyers over the course of one year for an aggregate price of $480.6 million.

It should be the high-season for sales of large apartment portfolios.

Big investors, including well-heeled international players who see demographic trends working to extend the nine-year rally in the apartment sector, are clamoring for listings - the more the better.

And owners who are ready to cash out have reason to expect to see a so-called "portfolio premium;" a bit more money for selling a package of properties over what sales of individual properties could fetch. A little sweetener for giving the new owner instant scale.

But in some cases, that’s not what’s happening. Several large apartment portfolios are being broken up - sold to multiple buyers or only sold partially. And the reason isn’t always simple.

"Sometimes the sum of the parts is greater than the whole," said Matthew Lawton, HFF's executive managing director for their investment advisory platform.

In April, HFF completed the sale of an 11-property, 3,039-unit portfolio that included apartments located in seven states, from the Carolinas to Minnesota. It sold for $480.6 million - to eight different buyers - over the course of a year.

"A lot of this is based on how capital is formulated. Some [buyers] want regional exposure, some want scale, some want more value-add," noted Lawton.

A case in point: AVR Realty, the New York-based owner-operator, launched a marketing campaign for a 13-property, 3,760-unit portfolio earlier this year. With properties located in North and South Carolina, Georgia and Florida developed between 2006 and 2018, the portfolio was pitched as a core package, with a little investment upside available through improvements at some of the properties. It would give an investor exposure in some of the country’s strongest rental markets, including Orlando, Tampa and Charlotte.

Experts pegged the value of the multifamily package at $850 million, or $226,000 per unit.

But it appears a single investor won’t take down that portfolio. Market players say the four Atlanta properties are under contract to one buyer, and two other assets in the Carolinas have a separate buyer lined up. The rest? Still on the vine. Some of the unsold properties may be taken off the market entirely, say some Southeast apartment pros.

Just yesterday, PGIM Real Estate, the real estate investment business of Prudential Financial, struck a deal to buy a 750-unit apartment portfolio, valued at $500 million, located in and around the red-hot San Francisco market.

But PGIM won’t be taking all of it. Instead, it plans to pony up about $250 million for a 50 percent stake. The seller, Los Angeles County Employee Retirement Association, will stay on as partner, according to the Wall Street Journal and other reports.

CoStar data shows that apartment portfolio sales of more than $1 million have decreased recently. After jumping from $22.8 billion in 2014 to $41.4 billion in 2015, portfolio sales dipped to $34.5 billion in 2016 and were down to $28.6 billion last year.

Cushman & Wakefield, which has the Southeast U.S. portfolio listing for AVR, declined to talk about the listing specifically.

But John Goldfarb, vice chair of the company’s national multifamily advisory group, said the decision to break up a portfolio can be driven by many factors and isn’t necessarily a sign of lack of interest from investors.

"Breaking up a portfolio may be more of an owner’s decision than a buyer’s," he said, adding that for sellers, the major motivator is almost always price.

"If they can get an accumulation of better offers, they’ll parcel them out," said Goldfarb.

In other cases, a property owner may be motivated to sell because a loan on the portfolio is coming due, or because the investor is exiting multifamily to concentrate on another asset type. Sometimes a fund owning the portfolio is reaching the end of its investment period and needs to return funds to investors.

In those situations, an owner may have a strong desire to sell quickly to someone who can take the whole package.

Regional preferences also come into play, say sales pros. A buyer may not want the Florida package in a portfolio for instance, and will bid on those locations it wants.

Cushman has another big portfolio on the market - a 12-property, 2,671-unit package in the Carolinas, Georgia, Alabama and Texas owned by Elite Street Capital of Houston that's expected to sell for about $250 million, say market players.

Another portfolio to keep an eye on is the giant Greystar Real Estate Partners offering being handled by Eastdil Secured and Marcus & Millichap’s IPA arm.

That 13-property listing is expected to attract bids of $1.2 billion. The 3,374-unit portfolio includes properties in greater Washington, D.C., Northern California and metropolitan Los Angeles. The geographic diversity may make it ripe to be broken up.

Capital markets pros close to the deal say Greystar is evaluating various offers that include ones to buy the entire portfolio and other offers for specific individual properties and sub-portfolios.

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