Carlyle Group LP (CG), the private-equity firm with more than a third of its $2.3 billion U.S. real estate fund in apartments, is reducing holdings of multifamily housing as rent growth slows from a post-recession surge.
The company is considering apartment sales as rising construction reduces multifamily shortages and price gains for rental properties make them less attractive for private-equity firms that seek returns of 20 percent or more, said Robert Stuckey, the Washington-based firm’s head of U.S. real estate investing. Carlyle has invested or committed about $800 million of equity in 61 multifamily properties since the start of 2011, he said.
“We went from an unusually high-growth market to a market that is growing and attractive but more stable,” Stuckey said in an interview. “Our capital was useful at the front edge of the recovery.”
Apartment-rent growth is slowing as the U.S. homebuying market rebounds and a wave of multifamily building adds to supply. In the third quarter, tenants on average paid 3 percent more than a year earlier after landlord concessions, down from 3.9 percent annual growth in effective rents in 2012, research firm Reis Inc. (REIS) said in a report today.
Effective rents averaged $1,073 in the three months ended Sept. 30, up from $1,042 a year earlier, and a 1 percent increase from the second quarter’s $1,063, data from New York-based Reis show.
“This remains well below what one would usually expect given such a low national vacancy rate,” Ryan Severino, senior economist at Reis, said in the report. “This reflects continued modest employment and income growth.”
The vacancy rate fell to a 12-year low of 4.2 percent from 4.3 percent in the previous three months, indicating demand remains strong even as new apartments enter the market. Completions of new units rose 64 percent from a year earlier to 34,834, the most since 39,007 units became available in 2009’s fourth quarter. New apartment units are 85 percent occupied or more, Reis said.
The low vacancies and occupancy gains are drawing institutional investors who are more focused on steady returns, Stuckey said. Potential buyers of Carlyle’s holdings include pensions, life-insurance companies and real estate investment trusts, he said.
“Investors really want the new Class A properties so we’re selling into that demand,” Stuckey said.
Carlyle was part of a group that last month sold an eight-story apartment building near Northwestern University in Evanston, Illinois, to Invesco Real Estate for $70 million. The property, 1717 Ridge Ave., opened for leasing in April. In July, a Carlyle venture sold a 280-unit garden-style apartment complex about one mile from North Carolina’s Research Triangle Park employment hub to Irvine, California-based real estate investor Passco Cos. for $28 million.
Recently finished apartments are commanding higher rents than older buildings in cities including Houston and Seattle, where multifamily construction has soared, particularly in the urban core, according to Dallas-based apartment research firm Axiometrics Inc. In Houston, tenants in properties built this year and last were paying 51 percent higher rents than the market average in August, the firm’s data show. In Seattle, leases in new buildings are 30 percent more than the market average and in Washington, 28 percent higher. The figures are for rents after any landlord discounting.
This year, about 125,000 new units are scheduled to open for leasing, increasing U.S. inventory by 1.3 percent, according to Reis. That jump is almost double the 0.7 percent rise last year and triple the 0.4 percent gain in 2011. The average increase in annual supply from 2000 to 2012 was 0.9 percent.
This year’s estimated completions remain below the average of 141,800 units that came to market in the five years through 2004, before construction dipped, according to Reis data.
Shares of apartment owners are reflecting concern about the outlook. A Bloomberg index of 19 multifamily real estate investment trusts is down about 13 percent from a May high and is the worst-performing in the past 12 months of all REIT property types.
Carlyle shares were little changed at $25.79 at 11:13 a.m. New York time. They have declined 1.3 percent in the past year.
As it sells apartments, Carlyle is focusing investments in areas such as senior housing, self-storage units and manufactured homes, where demand tends to be driven by life changes such as retirement or marriages, and isn’t so closely tied to changes in employment and gross domestic product, Stuckey said.
About one-third of the firm’s real estate investments are in properties that are more directly affected by the economy, such as office and retail.
“Our basic view is we’re in a low-growth environment,” Stuckey said.
Carlyle remains an active investor in New York real estate, including residential developments and office buildings with ground-floor retail, Stuckey said.
In February, Carlyle and ClearRock Properties acquired 920 Broadway, a 17-story office building in the city’s midtown south neighborhood, and are renovating the property. Office rents in the area, a popular district with technology tenants, have grown faster than Carlyle expected, Stuckey said.
Carlyle has two residential projects overlooking the High Line Park in Chelsea, on the far west side of Manhattan.
“With condos, our style is to build smaller projects that benefit from local demand,” he said.
The company has also made profitable exits from investments in the city. Carlyle in June agreed to sell 650 Madison Ave., an office and retail tower in Manhattan’s Plaza District, for $1.3 billion, setting a record per square foot for a U.S. office building.
Manhattan has widened its lead over other U.S. cities in its appeal to international investors, Stuckey said. Wealthy foreigners have flocked to New York trophy real estate after the worst recession since the Great Depression increased the appeal of dollar-based assets.
“It scared people and they want to put their money in safe places,” Stuckey said. “Right now, Manhattan is head and shoulders above the others.”
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