Even in the shadow of the Sears Tower—the tallest skyscraper in the United States—Chicago's Presidential Towers command an attention all their own. Built in 1986, the four 50-story towers sit on two city blocks in the West Loop and feature a five-story parking garage with 1,159 parking spaces, a three-story atrium with more than 100,000 square feet of commercial retail space, and 2,346 studio, one-bedroom, and two-bedroom apartments. When the Chicago-based Pritzker Realty Group (operated by the Pritzker family) put the properties on the block earlier this year, the bids flooded in.
Long the territory of the uppermost echelon of real estate power brokers, super deals like the Presidential Towers are beginning to get more attention as the number of industry players backed with oodles of cash continues to grow. “There was a lot of competition,” says David Schwartz, CEO of Waterton Associates, the Chicago-based firm that eventually won the bidding war. “I think you get more bidders the bigger things get these days. Certainly, when you are competing with bidders on the private equity side, bigger is better. They won't even consider a $50 million acquisition anymore.” Armed with a $430 million acquisition fund leveraged to $1.2 billion, Schwartz put $470 million on the table and consummated the largest multifamily property transaction in Chicago's history.
Meanwhile, in Arizona this summer, Colliers International senior vice president Cindy Cooke ended up someplace she never thought she'd be: on vacation. As lead broker for Phoenix-based Bascom Arizona Ventures, Cooke was charged in May with selling 12 of the company's apartment buildings (some 5,178 units). “We thought we'd be marketing and selling each property separately,” Cooke says. “But it became clear quite quickly that we would end up with a single buyer.” On June 2, The Bethany Group of Irvine, Calif., ponied up $428 million for the entire portfolio—the largest Arizona multifamily deal ever.
From the Windy City to the Grand Canyon State, New York to Washington, D.C., and (almost) everywhere in between, multifamily one-off and portfolio transactions this year are breaking records in both unit count and dollar figures. Despite the dismal residential for-sale market, institutional and private equity money seems to be hungry for multifamily deals, while a new generation of regional long-term holders looks to get sweat equity off the table.
“All of that is coming together for an extremely active transactional environment,” says Dean Sigmon, senior vice president for Coldwell Banker Commercial Ideal Realty in Potomac, Md. “That's exactly what is going on in the Washington, D.C., market.” Case in point: Just a little more than a year after the so-called “magazine portfolio” transaction of April 2006 that saw Sawyer Realty gobble up the Town and Country Realty Trust's 25,500 unit mid-Atlantic portfolio, Sawyer is repositioning some 20 mid-Atlantic properties into its own portfolio sale.
Meanwhile, D.C. multifamily heavyweight the Tower Cos. (majority owned and operated by the Abrahmson family) has decided to divest a large portion of its current multifamily portfolio, putting the entirety of the company's “Blairs” branded product on the block. Sigmon, who is acting as a co-broker on the sale, expects the portfolio to go for at least $400 million. “Our market is great,” Sigmon says of the underlying fundamentals powering such deals. “We've got significant job growth and significant year-over-year rent growth in all asset classes. It's one of the best markets in the country. Everybody wants to be here.”
LOOKING FOR VALUE Things aren't bulls and booms all over, though. Just 275 miles from Chicago's Presidential Towers, things continue to look dour in south Michigan, says Marcus and Millichap regional manager Steve Chaben. “[Marcus and Millichap] has 70 offices now, and I'll go to management meetings where everyone is talking about growth markets except for me,” Chaben says, adding that Michigan has not seen positive population or job growth since 2000. “You've got a [metro] infrastructure built for 5 million people that is now supporting a stabilized population of 3 million. So there is some major shucking and jiving going on.”
Despite record-breaking multifamily transactions in the first quarter of 2007, Robert Bach suspects that many big deals could be behind us. “Most of the brokers that I survey are still bullish on both the leasing and the capital markets,” says Bach, senior vice president of research for Grubb & Ellis Commercial Real Estate and author of its quarterly Capital Markets Update. “Definitely the downturn in the for-sale market has helped the numbers, but I would suggest that over the past three months, investors have become a bit more cautious. Owners have also put a lot more properties on the market, possibly fearing an end to the scenario of endless amounts of cash-chasing product.”
Indeed, cash is king, even for recent buyers such as Waterton, which aims to pump additional capital into the Presidential Towers in a value-add play to parlay the acquisition's 4.2 percent cap rate into bottom-line profit. Schwartz says the company will be making in-unit kitchen and bath upgrades, as well as lobby, garage, common area, and retail area improvements. “To us, there is a lot of low-hanging fruit,” Schwartz says. “It was incredibly well maintained but has a lot of aspects that the prior ownership did not want to [invest in]. When you are dealing with 2,300 units—even if it is just $1,000 per unit—that is a lot of money when you aggregate it, and that can de-motivate ownership when it comes to big capital projects.”
Waterton aims to stay motivated, however, and continues to look for acquisition opportunities. The company still has capital left in its Fund Nine—the same bucket used to finance the Presidential Towers purchase. “We obviously have to use up Fund Nine before we roll into Fund Ten, which I expect will be bigger than Fund Nine,” Schwartz says. “[Then] we will again be looking for the opportunity du jour.”
ACTION ITEMS HITTING THE BIG TIME
- Look for long-term holders. Often, second- and third-generation family companies are the best bet, especially those looking to divest and cash in on sweat equity.
- Merge and purge. Keep an eye out for portfolio possibilities that either combine or break up multi-property deals.
- Follow the numbers. As cap rates continue to compress, make sure underlying economic fundamentals support the value-added investments that lead to necessary rent increases.