Institutionals Back in the Apartment-Buying Game

By Jarred Schenke, Bisnow Atlanta

Institutional investors are back in the market to buy apartments in Atlanta, even in the suburbs.

Pollack Shores Real Estate Group Managing Director Brian Metzler noticed institutional investors largely disappeared from the apartment buyers market in Atlanta in the last half of 2016, replaced by private equity buyers. Then in the past 60 days, things changed, and core institutional buyers — REITs, pension funds and the like — are active again.

It is not just in the urban core. In fact, suburban apartments are a big buying target among institutional investors this year as they chase better yields and rent growth than what they see in Atlanta's urban core, where thousands of new apartment units are underway.

While multifamily fundamentals remained strong — with rising rents and lowering vacancies across the metro area — the performance has been much better outside of the city.

Cortland Partners Senior Managing Director Ned Stiker said institutional investors are simply reacting to a trend that has been some time in the making: Suburban municipalities are still tough on approving new apartment projects, so new supply is scant, and that is helping push rents up on garden-style apartments, even in the Class-B world.

“Institutional capital is like an ocean liner. It takes a long time to turn them, but they eventually turn,” Stiker said. Both Stiker and Metzler made their comments during Bisnow's Atlanta Multifamilly Surge of 2017 event on June 29.

It is a trend noted in a recent Marcus & Millichap report.

“Properties in the Downtown and Midtown areas will remain popular, but limited listings will push many buyers outside the urban core,” Marcus & Millichap officials stated in the report. “Attractive [net operating incomes] are motivating investors in Atlanta. Buyers are primarily targeting Class-B and C units where improvements can boost effective rents.”

That has put the heat under pricing. Average apartment prices rose 16% last year to $100,300/unit. In markets like Buckhead or Brookhaven, those prices can reach upward of $170K/unit, according to the report.

Institutional demand is something Walker & Dunlop Chief Operating Officer Kris Mikkelsen is capitalizing on. Just a week ago, he helped broker the sale of Alexan Lenox, a 305-unit Buckhead apartment complex, to an unnamed life insurance company for $59.25M, or more than $194K/unit.

For institutional investors, it makes more sense today to buy existing stabilized apartments than fund a new development, especially with so many uncertainties such as high construction costs.

“In general the math between building at wholesale versus buying it at retail is less clear today in light of rising construction costs,” Mikkelsen said. “You got clarity in the rents.”

The RADCO Cos CEO Norman Radow was an early champion of the suburbs. When most developers and investors were focused on properties along Interstate 285, Radow was buying apartments in suburbia, fixing them up and pushing up rents. Now, in some cases, demand for suburban properties is so strong, the cap rates — a percentage derived from the net operating income divided by the amount paid for a building — for value-add Class-B is lower than some Class-A simply because there is little being built out in the suburbs to compete with what is already there, Radow said.

“I've been saying this for years, but the market is figuring it out,” he said.

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