The Latest ‘Discovery' by Institutional Buyers

First it was Parkchester, then Stuy Town, and then, most recently, Starrett City. The blockbuster sales of such properties are indicative of a growing trend among real estate investors: their affinity for rental apartment buildings.

Analysts say that a tight rental market and rising rents are steering billions of dollars into these relatively low-risk investments, especially Mitchell-Lama-financed projects in Upper Manhattan and the Bronx.

"What is the flavor of choice for investors in 2007?" I asked the chairman of Massey Knakal Realty Services, Robert Knakal, at the taping of my television show last week.

"Everyone wants to own residential rental apartment buildings," Mr. Knakal said. "Portfolios of regulated apartments are greeted with insatiable demand from private individuals, REITs, and institutional investors alike. The extraordinary low risk inherent in these investments provides government-like security with above government-like yield. The amount of capital available on both a debt and equity basis for these deals is unprecedented."

Another partner at Massey Knakal, Shimon Shkury, said that within 24 hours of a new listing on a rental apartment building, at least two dozen serious investors would respond.

"The availability of financing and the pent-up demand by investors are fueling the fire. Investors who purchase this asset class of rentstabilized buildings are usually praying for vacancies in order to increase net operating income resulting from revenues for vacancy bonuses; major capital improvements, which will allow the units' rent to increase to market rents," Mr. Shkury said.

At the age of 13, the chairman of the global brokerage CB Richard Ellis, Stephen Siegel, was employed as a soda jerk in a candy store on 174th Street between Vyse and Hoe avenues in the Bronx. Now, Mr. Siegel, a partner with Andrew Goldberg and Jeffrey Goldberg in SG2 Properties, is buying up rental buildings in his old neighborhood.

SG2 Properties, in joint venture with institutional investor Black-Rock Realty Advisors, last week purchased 3,611 residential rental units with 80 retail stores in 51 buildings in the Bronx for about $300 million. The approximate value of all the residential units is $280 million, or $77,500 a unit.

Since 2001, SG2 Properties has purchased more than 70 residential rental buildings with commercial stores, comprising more than 5,000 apartments in Manhattan and the Bronx.

"I believe that the Bronx will be the next location in the city to enjoy the renaissance and enhanced quality of life that many other neighborhoods in the city have enjoyed to date," Mr. Siegel said. "The city has a declining availability of affordable housing, and this purchase enables us to purchase in scale a substantial amount of affordable housing in close proximity to public transportation."

Mr. Siegel said there are profits to be made for the patient owner. "If you spend some money and provide T.L.C., you can maintain and sustain occupancy levels at the highest levels possible, create a quality of life and atmosphere that people will want to be housed, and over time bring the rents to market and improve the assets value," he said.

A principal at SG2 Properties, Andrew Goldberg, said, "The cash flow and the stability of the assets provide a stable return as opposed to other asset classes. Over the past 18 months, our competitors for this product type have changed from local investors to institutional investors and REITs."

The chairman of the national real estate practice at Greenberg Traurig, Robert Ivanhoe, said rental apartments are the latest property type in the real estate sector to be "discovered" by institutional buyers. He said that because of a "tremendous" shortage in rental apartments and room for rent price increases, the value of the properties would perpetually increase. They require less capital than commercial properties, he said, and revenues, based on rents, are less tied to market volatility.

"The result is a slower, steadier, more predicable and less volatile cash flow growth than commercial properties, and for some investors and in some locations, the possibility of spectacular returns in very hot markets on resale or conversion," Mr. Ivanhoe said.

An executive broker at Besen Associates, Adelaide Polsinelli, said rentals are immune to market fluctuations that plague the market for office properties and luxury condominiums.

"Rent-regulated apartment buildings are what make up the majority of housing in New York City, accounting for 67% of the housing stock. There is always a shortage of housing in this category, with zero vacancy rates and high demand. This asset class is guaranteed to be in demand regardless of what is going on in the market," Ms. Polsinelli said.

Last week, Clipper Equity, an entity composed of David Bistricer and Sam Levinson, through its Berkshire LLC agreed to pay $1.3 billion, or about $221,000 a unit, for Starrett City's 5,881 apartments in 46 towers across 140 acres in the East New York section of Brooklyn. A number of years ago, Mr. Bistricer owned and managed Vanderveer Estates, a complex of 59 rental apartment buildings on 30 acres in East Flatbush built in 1949–50 on the site of the old Flatbush Water Works.

Before the end of spring, another rental complex will sell for about $1 billion. The New York Sun has learned that a joint venture of a local investment group has entered a contract for a portfolio of rental apartment buildings on the Upper West Side and in Harlem. The joint venture is paying about $250,000 a unit for the 4,000 units in these buildings, many of which were constructed and financed through the Mitchell-Lama program.

"The attraction for these older rental properties is not the current cash-on-cash return, but rather the long-term high-yield expectation fueled by patient money," the president of Metropolitan Valuation Services Inc., Steven Schleider, said.

Seasoned operators, he said, could unlock value in the buildings through lease buyouts or "other methods" to promote attrition of rent-regulated tenants. The vacated units would then be repositioned at higher market rate rents.

"This is an investment strategy that is different from owning highend luxury rentals where condominium conversion may be the exit plan. As income rises and barriers to developing middle-market housing in established neighborhoods are pushed higher, market rents for existing apartments will increase, abating investment risk," Mr. Schleider said.

The City Investment Fund has purchased approximately 4,600 units of rental apartments since inception in February 2004. Its operating partner is Urban American LLC, an investment firm owned by Eisenberg Family and Ramius Capital Group. The joint venture is currently under contract to sell their first investment, a 1,400-unit complex of apartments in the Bronx, known as Eastchester Heights. The president of the City Investment Fund, Thomas Lydon, said: "Many of these properties have not had capital improvements for many years. The opportunity to invest in the property and upgrade the apartments has proven to be a good riskadjusted investment for our fund."

The buyer of Eastchester Heights is Taconic Investment Partners, according to real estate sources. Last summer, a joint venture of Taconic and Apollo Real Estate Advisors, purchased 983 condominium units at Fairfield Towers, a residential complex with 19 high-rise and townhouse buildings on 21 acres in the East New York section of Brooklyn. The joint venture paid about $90 million, or $91,556 a unit, to Fairfield Presidential Associates, an affiliate of the Lightstone Group.

An investment group has entered into a contract for local investor Steven Kessner's East Harlem portfolio, which consists of 47 four- to six-story walk-up and elevator buildings in East Harlem. The buildings are between East 100th and East 122nd streets between Park Avenue and FDR Drive. According to real estate sources, the properties will fetch about $225 million, or 13 times the gross rent roll.

"Income-producing multifamily property continues to have tremendous demand and is as prized as any category in the real estate industry," a principal at Eastern Consolidated Properties, Alan Miller, said. "Cash flowing residential assets are trading at extremely compressed capitalization rates and with a plethora of investors both domestic and foreign vying for deals, it has remained the best sellers' market in my two decades in the business."

An investment group has entered into a contract to acquire a portfolio of buildings in Brooklyn and Queens from the Bassuk family for about $120 million.

Four- and five-story walk-up apartment buildings are selling at record prices. This week, a local investor entered a contract to sell a portfolio of 13 buildings, three in the Inwood section of Manhattan and 10 in the Bronx. The portfolio of 429 rental units, 12 stores, and three commercial spaces traded for about $38 million, or 8.7 times rent roll, adding up to $88,000 a residential unit.

There are still hundreds of rental apartment buildings on the market. In Central Harlem, Massey Knakal is marketing 12 buildings with 132 rental units and three commercial units. It is asking $16.2 million, or about $120,000 a unit.

There are two prime rental elevator buildings with 50 residential units and two commercial units for $15.5 million on Frederick Douglass Boulevard between West 111th and 112th streets.

Massey Knakal is also marketing a portfolio of six buildings in Manhattan containing 207 rental apartments and 15 stores. Mr. Knakal expects the portfolio to fetch a price in the mid-$70 million range.

For my readers who prefer to own two contiguous pre-war, elevator rental apartment buildings perfect for conversion to condominium ownership, one has to make an offer close to $55 million for 15 and 19 W. 55th St., between Fifth and Sixth avenues. Of the 64 apartments, 46 units are free market or vacant, 15 are rent-stabilized, and three are rent-controlled.

I have to concur with Mr. Ivanhoe when he says the recent "discovery" of the residential multifamily market by some new buyers "will require a bit of a different approach and mind-set than in the ownership and management of other property types."

"While the potential for rental growth is generally the main attraction in residential ownership, increases in operating and capital costs are often underestimated," Mr. Ivanhoe warned. "It is the game of patient, long-term, strong, and steady investors who really know the business well. It will be interesting to see if the new entrants into this arena truly understand the difference and have the patience and fortitude to be successful, justifying the spectacular prices now being paid for what were once viewed as ‘meat and potatoes' real estate."

Mr. Stoler, a contributing editor to The New York Sun, is a television broadcaster and senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.