The portfolios are starting to fly off the market in the Washington, D.C., area. Earlier this week, GlobeSt.com reported Washington, D.C.-based Jair Lynch Development Partners was acquiring a 500-unit portfolio, which would increase the company’s total portfolio size by 40 percent.
Lynch’s buy isn’t surprising to brokers who say the portfolio market is starting to surge in the nation’s capital. In fact, it’s the second major portfolio sale in the past 60 days. In March, Dune Real Estate Partners and Pantzer Properties, both out of New York, acquired the eight-property, 2,580-unit “Magazine Portfolio” in Virginia and Maryland for $460 million.
The Dune deal not only illustrates the portfolio trend, but also shows that the D.C. market is attracting outside interest that may not even have a large background in Washington-area multifamily. “Dune had not been in multifamily,” Melnick says. “They are large hedge fund with a real estate section. They bought a $460 million portfolio because they saw the Washington market pop in rents.”
White Plains, NY.-based Starwood, which also hadn’t had a huge multifamily presence in the D.C. market recently scooped up a seven-property, $300 million portfolio. Other companies, such as Harbor Group International, based in Norfolk, Va., and Gellar Associates from Roseland, N.J., have also made plays in the D.C. market.
“We’re seeing a lot of interest from out of towners that didn’t have a presence in the D.C. region,” says Dean Sigmon, senior vice president and a director in Mid-Atlantic Region for Houston-based Transwestern. “We’re seeing interest from groups that have not historically had much of a significant multifamily presence.”
But in many cases, Sigmon says these people haven’t been closing deals. “We have not found them to be competitive as of yet,” he says. “They’re getting priced out of the market by the companies that specialize in multifamily.”
Local players, such as Washington, D.C.-based Federal Capital Partners and Rockville, Md.-based The Donaldson Group, also remain strong buyers. “It’s the same cast of characters but magnified by the fact that everybody wants to be here,” Melnick says. “There are lots of groups with lots of money to get out. Because of the safety, stability, and growth potential in rents, Washington, D.C., makes people bet a little more.”
Difficulty Making Deals
Sigmon’s associate, Robin Williams, senior vice president of the Transwestern Institutional Multifamily Group, says private capital guys who raised funds and can make quick decisions on investment and private capital who have institutional equity backing them have the advantage in today’s market. But private capital that relies on leverage can’t compete.
“The debt structure in today’s market doesn’t work,” Williams says. “You must have a low leverage transaction for it to work.”
Ari Firoozabadi, vice president of investments and director the National Multi Housing Group in the Bethesda, Md., office of Marcus & Millichap, claims most of the outside interest in the D.C. area doesn’t really materialize into anything. “I get calls on a daily basis from outside groups looking to come in,” he says. “The first round of conversations is always about how they’re structuring deal and what they’re looking to accomplish?”
Once they realize cap rates aren’t really much lower in Washington, D.C., than in, say, Manhattan, that interest usually fades. “Why would you come to D.C. to pay similar prices and take the risk [of not knowing the market]?,” Firoozabadi says. “You have to want to be in the market. There are a lot tire kickers who think it’s cheaper than it is. They go to back to drawing board when they realize they can’t buy an 8 [percent] cap deal here.”