When making investments, people put a lot of thought into what enters and leaves their portfolios. Real estate is no different. Real estate investors analyze the market, what properties have the most profit potential, what to buy, and what to sell. As of late, investors have been investing in apartment complexes due to high rental occupancy rates and low homeowner rates. The owners selling their properties have noticed their own trends: that their rental portfolio seems to be worth more when broken up, compared to when the properties are sold together as a package.
The Sofia Apartment Complex
The Sofia apartment complex in Los Angeles is one of the most recent examples of this. The Sofia is known for being “the second-biggest multifamily deal in the metropolitan area this year” based on its asking price. It was a part of a billion dollar rental portfolio that had trouble being sold, that is, before it was broken up.
The Sofia apartment complex, and the portfolio it is a part of, are not undesirable. The lack of attention the portfolio received was not due to any inherent flaws with the properties themselves. As a matter of fact, once the rental portfolio was broken up, five out of the six properties (including the Sofia) ended up being sold. If there are interested parties for these properties, why does the interest not translate when they are bundled together?
Changing Demand for Rental Portfolios
Blake Okland, the head of Newmark Knight Frank’s apartment platform, attempted to explain this discrepancy. He discussed how buyers in the market do want scale in their real estate investments, however every property in a portfolio may not be a perfect fit for each individual buyer.
“They absolutely want bulk. The problem is, what comes to market may not be what they want: the asset profile doesn’t fit, the geography might not fit,” he said. “The practical reality is that sometimes there’s just more value in breaking things up for separate buyers.”
Josh Goldfarb, a multifamily chief for Cushman & Wakefield, continued the conversation by adding his take on how portfolios typically sell successfully.
“As a general rule, nine-plus times out of 10, [a portfolio] gets cut up to get the best price. Rarely do we see the whole thing taken down by a single buyer.”
These do certainly seem like valid explanations for why properties begin to sell once the bundle they were a part of is broken up, but not when originally bundled together. The multifamily market has been facilitating apartment and rental property investments in recent years, so prime real estate not being purchased most likely could not have been due to a lack of interest. If the market continues at its state, these investment practices may actually become more common.
Will the Multifamily Market Allow Rental Portfolio Changes to Persist
CoStar analyzed the multifamily industry and determined that the typical symbols of a weakening multifamily economy do not seem to be true of the market at this point in time. Occupancy rates are high, and investors are expressing a great deal of interest in various rental properties. The vice president of CoStar Market Analytics, John Affleck, addressed what he sees in the future of the multifamily market, but first contrasted this with a seemingly opposing analysis.
“Slower job growth also means fewer new households, and less demand for housing. And that means the 660,000 apartment units currently under construction may be competing for a shrinking pool of renters.”
With this “shrinking pool of renters”, the market should suffer, however, Affleck found that the market also benefited from demographics changes that have been taking place over multiple years. Demand for apartments is higher with younger generations who are beginning to make some money, but are not settled down enough to consider buying a home. Affleck analyzes these contradictory effects on demand, and provides his conclusion on the future of the apartment market.
“Our models think vacancies are pretty low, see all the supply, and think that fundamentals have to weaken. I expect the market will hold up in the near term. And, in fact, we are adjusting our model a bit to produce stronger demand in the near term. This change will go into effect right after we release the third-quarter snapshot later this month. So, for viewers who wouldn’t mind a little more optimistic outlook, stay tuned.”
While investors have maintained a healthy interest in investing in apartment complexes, the desire to invest in rental portfolios has changed. Not every property in the portfolio will be attractive to an investor, so they prefer for the portfolio to be broken up. This way they can purchase the individual properties they have an interest in.
While there are concerns on whether the multifamily market will continue to have this degree of interest in the future, experts believe that the interest will indeed persist. This will lead to the current trend of rental property demand continuing.