It wasn’t easy seeing green for 2023 multifamily investors
South Florida developers interested in attached residential homes, assisted by their property brokers and real estate attorneys, just tackled a tough year. Triggered by expensive financing and the higher costs associated with hurricane and other property insurance, multifamily real estate investment took a hit in South Florida toward the end of last year, “Even seasoned real estate developers and experienced builders are facing rising challenges in 2023,” Dov Stark, CEO of Prestige Homes, writes in Forbes, citing increased competition, rising costs, labor shortages, higher insurance premiums, and market uncertainty.
In contrast, 2022 was the second highest year on record for multifamily sales according to commercial real estate brokerage firm Cushman & Wakefield. But a few buyers, properly leveraged, are succeeding in this risky, tumultuous market. Private out-of-state buyers are the most active in the multifamily space, according to Cushman & Wakefield’s report, “spurred by the positive market fundamentals, and a business-friendly environment.”
Let’s take a look at a few recent examples to find the common denominators of multifamily investment success.
AIRC buys Miami Beach apartment towers for $250M
The biggest deal took place in January of 2023 when an affiliate of Apartment Income REIT Corp. bought the Southgate Towers apartment complex for a combined $250.47 million. The transaction subsequently launched a high-low-high year of innovative development investment.
Southgate Towers, originally built in 1958 along Biscayne Bay, had been among the tallest buildings in the Miami area. In response to a society transitioning to work-from-home, its long vacant bank offices, after numerous owners, the property underwent a major $40 million redesign whose first phase was completed in 2016 which included amenities associated with resort-style living, a new parking garage, 253 redesigned residences at South Tower, and 242 redesigned residences at North Tower.
By 2022, the second phase was completed. When Air Communities closed their deal for the pair of towers, it turned out to be Florida’s largest multifamily sale of 2023.
Praedium Group scored a Lantana complex for $138M
Late in the year, the New York-based real estate investment firm, the Praedium Group, spent $138 million to acquire an apartment complex in Lantana. Praedium used equity to cover about half the price, borrowing $76 million from Northwest Mutual Life Insurance to cover the rest. With a fixed rate in the mid-5 percent range, this gave them a much better deal. Today rates are above 7 percent.
Praedium aren’t the only players winning at the multifamily game, and by studying their tactics we can reveal some best practices for other creative investors who want to throw their hats into the ring of multifamily investment.
Harbor Group International acquired 2 West Palm Beach Buildings for $180.5M
Last June, Harbor Group International paid a total of $180.5 million for two apartment complexes in West Palm. The global real estate investment and management firm forked over $75 million for the 288-init Pine Ridge complex and $105.5 million for Locklyn West Palm, a 280-unit complex. Money for both came out of the firm’s investment opportunity fund.
Harbor assumed Pine Ridge’s existing $37.2 million floating-rate loan, buying a cap to limit the rate to 5 percent. To finance the Locklyn deal, Harbor borrowed $56.6 million from Freddie Mac at a fixed 5.1 percent interest rate. Today cap rates range from 4.2 to 4.5 percent for Class A properties and from 4.75 to 5.5 percent for Class B and C properties.
This works out to $376,000 per unit at Locklyn and $260,000 per apartment at Pine Ridge. Palm Beach County’s record average last year was $385,000 per unit. Praedium paid $396,600 per apartment for the Lantana complex, which is higher than the average, but they got an undisclosed discount off the asking price. Praedium’s investment fund was over $728 million last year, so they are ready to take advantage of any deal that comes along.
Pine Ridge was 25 percent occupied when Harbor purchased the property, and they are expecting it to fully lease.
Federal Capital Partners bought apartment community in North Lauderdale for $53.2M
Federal Capital Partners purchased the Avana Cypress Creek apartment complex in North Lauderdale for $53.1 million, taking on the seller’s $29.9 million debt at a low 3.83 percent interest rate. With rates much higher now this was quite a bargain.
Like the other buyers, FCP delved into its $1.2 billion realty purchase fund to make the buy.
Discretionary funds and Freddie Mac underscored new funding attitude
By studying recent sales, commonalities emerge among these buyers. Half of the investors analyzed by The Real Deal made their purchases using discretionary funds, avoiding expensive bank and debt fund loans. They also got more favorable terms by assuming sellers’ notes or borrowing from Freddie Mac and various insurers.
The lack of competition didn’t hurt either, allowing buyers to snap up properties at discounts between 15 and 30 percent compared to the previous year.
“It’s a very good time for you to buy core assets right now,” Robert Given of CBRE told The Real Deal. Firms that are under leveraged and making all-cash offers can snap up assets without competing with most multifamily property buyers.
What motivated 2023’s divestitures
All this multifamily purchase activity begs the question: why are owners willing to sell their complexes? No one knows for sure why a particular seller makes the decision to divest an asset.
However, in a few cases, apartment developers had floating-rate debt and owned complexes that were recently completed but not yet fully leased. They might have experienced construction cost overruns and were looking at loans that were about to mature, meaning rising interest rates. However, sometimes a sale is part of a company’s business model.
Resa, who sold Pine Ridge, always sells its complexes soon after completion. To avoid cost overruns, the company uses its own in-house construction division to build each complex it develops. As part of the Pine Ridge deal, Resa kept a small stake, which will provide it with capital for future projects.
As any commercial real estate lawyer in South Florida can tell you, debt issues aren’t the usual culprit behind multifamily apartment sales. Many investors pool their properties across the country into a fund along with other types of real estate assets. Fund guidelines require them to periodically shed some properties. It could also come down to simple timing.
Many of these deals closed just before the end of the second quarter, which is always reporting time for companies. A large property sale can look good on a balance sheet.
Fear of rising interest rates and inflation could also be compelling owners to sell. Sure, they could hang onto a property a little longer and get more for it later, but the profit from the sale will be worth less due to inflation.
By using creative funding based heavily on private capital and a willingness to play a higher risk game, these savvy multifamily investors succeeded where others feared to tread.
Contact Florida Bar Board-Certified Attorneys David E. Klein, Esq. and Guy Rabideau at Rabideauklein.com. They have the expertise and experience you need to ensure that your interests are protected throughout your real estate transactions across the Palm Beaches and throughout the state. Contact Rabideau Klein today to discuss the legal implications of your Florida property transactions.