Multifamily Sector Update 11/8/2015

“Sam Zell Sells Suburban Units to Starwood Capital Group for $5.4 billion”

Sam Zell, chairman of Equity Residential, is selling 23,300 apartments to Starwood Capital Group for $5.4 billion. The transaction will rid Equity Residential of around a quarter of the units in its portfolio, and will be one of the largest transactions since the 2008 recession. The units are spread across suburban markets in Florida, Denver, Seattle, Washington, D.C., and Southern California. Zell is credited with calling the peak and impending downturn of the real estate market in 2007. Many investors are beginning to question how long the high prices in the market can last after the steep ascent of prices since the recession, given that some offices and hotels in the U.S. are at record values and rents have risen 20% in the past five years. Zell is moving from suburban markets to urban centers due to the influx of young people (who no longer tend to buy houses but opt for urban living instead), and the difficulty to build in those areas. Three-fourths of new apartments set to be completed in 2015 are in suburban markets. On the other hand, Barry Sternlicht, CEO of Starwood, has bought or put under contract 67,800 units this year and does not see the high prices of the market reversing anytime soon. Both Zell and Sternlicht have historically done well in economic downturns, by buying commercial real estate cheaply and then selling for nearly double the value in the recovery. The capitalization rate (a measure of yield) on this portfolio is about 5.5%, which is on par with recent deals.

“Brookfield Makes Ambitious Bet in Brooklyn”

Brookfield, one of the world’s largest office landlords and NYC developer, is making its first move into Brooklyn by buying a majority stake in two new apartment towers, totaling 780 units on the waterfront that have not yet been built. They are making a bet that Brooklyn will continue to develop and become the new hotspot destination for NYC residents. Sam Zell and Blackstone Group, LP have both been betting on urban center apartments as well. The two towers are just a piece of a 22-acre project called “Greenpoint Landing,” which is set to have 5,500 units developed over the next decade. This project is part of a larger movement of rezoning and promoting high-rise development in Greenpoint and Williamsburg, two neighborhoods on Brooklyn’s waterfront. Williamsburg has become a very desirable neighborhood, with average rents at $4,100 for a two bedroom apartment, while Greenpoint has lagged behind, averaging at $3,200 for a two-bedroom apartment, due mostly to its inferior access to transportation. This project is seen as the most ambitious development in Brooklyn thus far, especially with the lack of public transportation access. Brookfield has said it will try to get a ferry stop built near the new apartments and/or a shuttle bus to the subway to alleviate this problem. Building will begin in the first half of 2016. There are 21,822 new units to be delivered in Brooklyn by 2019, up from 10,052 delivered between 2010 and 2014, which will all be about one third below the average Manhattan rent of $3,995.