Moving, shaking, and dominating. That was Morgan Stanley Real Estate in '06. The company has had a multifamily presence for some time, but after acquiring platforms and portfolios with fervor, it vaulted to near the top of this year's owners list.
The new slot—No. 3—represents a 565 percent increase and about 90,000 new units for Morgan Stanley, which closed the major acquisition of public REIT AMLI Residential in early 2006.
“What caused us to take such big steps last year is that we assessed views on different property sectors to determine where to get the best return for our clients,” says Dave Hardman, managing director and head of U.S. real estate investing for Morgan Stanley. “We began to really focus on multifamily because we felt that it would deliver the highest net operating growth.”
And focus they did. Funds managed by Morgan Stanley Real Estate acquired a second multifamily REIT in 2006: Town & Country Trust, which they landed in a bidding war. Morgan Stanley also entered into a 49 percent joint venture acquisition of Crescent Resources, a real estate and land development firm based in Charlotte, N.C.
Hardman says the AMLI brand name was a significant factor in last year's success. “AMLI senior managers Greg Mutz, Allan Sweet, and Philip Tague have done a superb job of transitioning their organization from a pub licly traded company to a pri vate platform,” Hardman “and that gives us the management expertise to create performance, not only for existing properties but in developing new apartment communities. We feel we met and exceeded our expectations, quantitatively as well as qualitatively.”
Both economic and demographic trends are continuing to support apartments. Weakness in the for-sale housing market, rising foreclosure rates, and relatively high single-family home prices make rental apartments an appealing decision for consumers and smart investors alike.
“The baby and echo-boomers are really going to be driving multifamily in general,” Alliance Residential President Bruce Ward predicts. “What seems to be happening is that both demographics are looking to be in more high-density urban housing.”
Alliance Residential also made numerous acquisitions in ‘06, putting it on the MFE Top 50 owners list as well. “We gained ownership just by virtue of acquisitions,” says Ward, whose firm acquired $750 million worth of multifamily assets last year.
Pinnacle, an American Management Services company, also chose an acquisitive strategy in 2006. Traditionally known as a multifamily manager, Pinnacle concentrated on buying, improving, and selling those properties last year.
It wasn't always easy to do.
“Depending on the market, the challenge is buying conventional assets at the prices the market dictates right now,” says Pinnacle President and CEO Stan Harrelson, whose firm still landed the No. 12 spot on the owners list.
To compensate for pricing pressure and cap rate compression, Pinnacle increased ownership in the affordable and military housing areas. Harrelson says his company amassed nearly 20,000 units of military housing and increased its low-income and tax-credit portfolios as well.
The advantage is two-fold. “These have the same equity and profit motives, but it also helps the management company in that these are long-term management contracts,” Harrelson says.
There may be more good news to come for apartment owners: Harrelson predicts his company's progress this year will dwarf Pinnacle's 2006 gains. Expect the same from Morgan Stanley, whose executives plan to use its new-found expertise and economies of scale to become an even more powerful buyer.
Mikaela Bufano is a freelance writer in New York.