Crescent Dilworth, located in Charlotte, is expected to open in mid-2015. It was sold as part of a nine-property portfolio.
Crescent Dilworth, located in Charlotte, is expected to open in mid-2015. It was sold as part of a nine-property portfolio.
Charts and numbers speak to Stephanie Mcclesky and the team at Axiometrics.

So when Mcclesky began analyzing the stats associated with multifamily transactions this year, she saw the numbers dance into secondary markets where cap rates continue to compress and value-add deals are the name of the game.

“One of the reasons why there’s not a lot of deals in the Class A primary markets is because development was so slow in the early part of this cycle that we’re just now starting to see deliveries,” she says. “We are expecting transactions in that space will probably pick up in the next couple years.”

Indeed, secondary markets experienced the most transaction growth this year while the Sexy Six metros—New York, D.C., Boston, Los Angeles, Seattle and San Francisco—remained relatively flat.

“Yields in the primary markets are getting very low, and there are only so many high quality assets in those markets,” Ben Thypin, director of market analysis at Real Capital Analytics, says. “Investors that need higher returns have to go to other markets to find them. Everyone would love to get an 8 cap in New York, but that’s not really out there.”

Consolidation Trend

Essex Property Trust, a Palo Alto–based REIT, found a way to gain ground in high-end markets by acquiring the competition. In April, Essex closed the $4.9 billion stock-and-cash deal with San Francisco–based BRE and in the process became the third-largest apartment REIT in the nation. 

The BRE acquisition gave Essex a  portfolio of more than 56,000 units within 239 communities primarily in Seattle and California, $1.2 billion in annual revenue, and $10.4 billion in equity market capitalization. And it gave Essex the top spot on this year’s rankings.

“Typically the largest transactions are large portfolios, often M&A transactions, so that doesn’t surprise me that it was the largest,” Thypin says. “I’m surprised we haven’t seen more of those large portfolio sales and that may be because there were so many of them [in 2013].”

But Essex CEO Mike Schall believes there’s still some juice left in the consolidation trend space. “It’s the nature of the business. We are looking for yields. We are looking for spreads between investments on the one hand, and cost of funds on the other hand,” Schall says. “And our entire investment process, be it sales, be it redevelopment, or acquisition development, really emanates from that same concept.” 

Other industry leaders think mergers will continue, but not with the urgency that characterized 2013. In September, Tom Toomey, CEO of Highlands Ranch, Colo.–based UDR, predicted that there wouldn’t be any other large-scale mergers or acquisitions to close out the year.

“I think the wind is at our back, people’s optimism is high and they don’t want leave money on the table and so they won’t do anything,” he said.

Fourth-quarter books weren’t closed at press time, but Thypin reported multifamily transaction volume to be at $92 billion in early December. “It’s down 10 percent compared to last year through the same period,” he says. “And typically the fourth quarter will bring in a lot of volume, so I would expect a fair amount of volume by the end of the year and we’re going to end up flat or slightly up.”

But overall it’s a good time in the cycle to get a merger closed if companies can jump the hurdles of coming to an agreement, says Ed Pettinnella, CEO of REIT Home Properties.

“In my career, having done M&A in the banking industry, they’re hard to do,” he says. “For every one you see in the paper, there’s probably 100 of them that never get consummated because it’s so hard to get two CEO’s, two boards of directors, get all the egos and social issues dealt with to make something happen, it’s hard.”

Portfolio Power

Although the Essex-BRE deal seems to steal the spotlight on the transaction stage, there were other noteworthy portfolios and properties changing hands in 2014.

The second-largest deal kicked off the fourth quarter of 2014 with gusto. The Dallas-based private equity firm, Lone Star Funds, purchased a massive portfolio in a transaction that was estimated to cost about $1.8 billion. Greensboro, N.C.–based Bell Partners and New York City–based DRA Advisors were the sellers.

The transaction included 20,439 units at 64 communities in nine states including 6,800 units in North Carolina, more than 5,000 in Texas, and the rest in Arkansas, Delaware, Florida, Maryland, Ohio, Tennessee, and Washington.

The portfolio was originally purchased as part of an 86-property joint-venture deal that DRA and Bell closed in 2008. The two companies have since sold the other 22 of the properties to different buyers. The debt on the original portfolio purchase was coming up for refinancing when the two firms decided to sell.

“We’re excited to deliver great results to our investors,” says Jon Bell, president of Bell Partners. “It feels good to have closed out a successful investment.”

Meanwhile, the purchase of the third-largest portfolio carried a $906 million price tag and included 3,962 units. Brookfield Property Partners purchased five properties, all located in Manhattan, from Urban American Management Corp. in November.

Another portfolio deal that made a splash last year was the sale of nine Crescent Communities properties for a nearly $700 million price tag.

Charlotte-based Crescent sold the communities as a portfolio of 2,667 units to an undisclosed private investor and UBS Global Asset Management. The properties span the Sunbelt with one Tampa property, one property in Raleigh, two in Charlotte, two in Atlanta, one in Orlando and two in Durham, N.C.

Each property in the portfolio is being sold upon completion, says Brian Natwick, president of multifamily.

“By recapitalizing these investments, it gives us the opportunity to fuel our future growth,” Natwick says. “It allows us to multiply in the southeast and southwest markets.”

Avalon Chrystie Place Top Single Asset Sale

While major portfolio deals are often the most talked-about, the sale of significant single assets can sometimes be overlooked. Avalon Chrystie Place in Manhattan, No. 6 on the list, was sold by AvalonBay Communities for $365 million in the largest single-asset transaction of the year.

Avalon Chrystie Place was Arlington, Va.–based AvalonBay’s first ­development in New York City and was sold for $365 million, to ­Ashkenazy Acquisition Corp. The 14-story, 361-unit building is anchored by a Whole Foods Market store and other retail space. 

The building was completed in 2005, just before the area, at the intersection of SoHo, the East Village and the Lower East Side, got a dose of urban redevelopment and became one of the city’s most coveted neighborhoods to live in.

So when Andrew Scandalios and HFF marketed the sale, buyers flocked to the deal’s possibilities.

“It’s extremely rare that an asset of this size becomes available downtown,” Scandalios, senior managing director, says. “The interest was 50 percent more than any other offering we had this year.”

The No. 10 deal was also a single-asset purchase. Clarion Partners purchased Palazzo Westwood Village in July for $300 million. The Los Angeles property features 350 units with one- to three- bedroom layouts and a townhome option. The high-end, luxury property’s units include gourmet kitchens, private terraces and full-service concierge living, according to the property’s website.

MFE contributing editor Joe Bousquin added to this report.

The Top Deals of 2014 

1. $4.26 billion: Essex Property Trust buys a portfolio from BRE Properties 
2. $1.83 billion: Lone Star Funds buys a portfolio from Bell Partners and DRA Advisors 
3. $906 million: Brookfield Property Partners buys a portfolio from Urban American Management and Fannie Mae 
4. $700 million: UBS Global Asset Management and affiliates of Berkshire Group buy a portfolio from Crescent Communities
5. Undisclosed: Berkshire Property Advisors buys a portfolio from Broad Street Development and Crow Holdings 
6. $485 million: Stellar Management and Cherit Group buy a portfolio from Helmsley Enterprises and Schneider and Schneider 
7. $365 million: Ashkenazy Acquisition and American Realty Advisors bought Avalon Chrystie Place from AvalonBay and JP Morgan
8. $342 million: Blackstone buys a portoflio from Western Rim
9. $311 million: Morgan Properties and Olayan Group buy a portfolio from Berkshire Property Advisors
10. $300 million: Clarion Partners buys Palazzo Westwood Village from Casden Properties and CPP Investment Board 

Source: Real Capital Analytics