Apartment Investments Capped Out?

Another apartment tower hits a high-price watermark in Atlanta as we fast approach our Multifamily & The Mixed-Use Revolution event Sept. 18 at the St. Regis (tickets here).

Investors have been willing to pay big for Atlanta apartments now for some months. We asked Cushman & Wakefield's Michael Kemether (iphone-snapped with partner Brandon Whitesell), who's one of our headliners at the upcoming event, why. Simply put: Atlanta's economy is back on track, and investors see us early in a recovery. “Now we're adding jobs at a pretty good clip. That, coupled with the phenomenon going all over the Southeast, which is an in-migration of residents who want to live in an urban environment,” he says.

Here's a great example for the apartment appetite: The Wilbert Group's Tony Wilbert blogged this week about Daniel Corp's big sale of 77 12th St, its marquee 330-unit apartment tower at its 12th & Midtown project. Daniel sold it to a Florida investor named John Joyce for $121M, or just shy of $400/unit.

Mike should know. He sells apartment complexes for a living. Most recently he brokered the sale of The Flats at Atlantic Station (here), a student housing project across from IKEA for Trimont. The project was picked up by Times Square Capital for nearly $16M, or $56k/bed. He and partners Chris Spain and Brandon are also currently marketing Solace on Peachtree, a 533-unit high-rise next to The Fox Theater on Peachtree. This feeding frenzy has led to compressed caps, Mike says—sub-5% for trophy urban properties. And there's an irony taking place: Some value-add apartments are actually fetching lower cap rates than stabilized brethren because investors expect to be able to raise rental rates with a little TLC, he says.

“I just saw a 1985 suburban deal, nothing out of the ordinary, with vinyl siding, just trade for a sub-5% cap,” says The RADCO Cos' Norman Radow. But compressed cap rates are no secret, and no bubble, he says. “If you're buying at a 6% but you can finance on a floater from Fannie Mae at a 2%, the cash-on-cash going in is tremendous,” he says. “In this environment where yield is impossible to find, who cares about the exit?”

RADCO most recently purchased Keeneland Farms, a 439-unit apartment complex in Smyrna, and Brown Ridge, a 114-unit complex in Newnam, from Fannie Mae for $33.2M. It's the type of product Norman says he seeks: Underperforming assets that are marked-to-market. But those deals are increasingly difficult to find. “We lost a deal last week, a mid '60s deal with sewage backup and incidents of mold, and an institution bought it. I said, 'Really?!'” “The amount of assets we can buy is going down, there's no doubt about it.”