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Manhattan Apartments Lure Investors Seeking Market Foothold

Office and residential buildings stand in midtown Manhattan in this aerial photograph taken over New York. Photographer: Andrew Harrer/Bloomberg
Office and residential buildings stand in midtown Manhattan in this aerial photograph taken over New York. Photographer: Andrew Harrer/Bloomberg

March 18 (Bloomberg) -- When UDR Inc. agreed to pay $260.8 million for a tower in Manhattan’s Financial District, it was not only the borough’s biggest apartment sale in almost three years. It was also the company’s first foray into New York City.

The deal this month by Highlands Ranch, Colorado-based UDR is the latest by a multifamily property investor trying to establish a beachhead in the borough, as apartment demand climbs and rents recover from last year’s lows. Several new players are finding opportunity as city mainstays such as Equity Residential, which bought three prime high-rises from developer William Macklowe in 2010, turn their attention to less-costly acquisitions outside New York.

Manhattan “has everything going for it from a multifamily perspective,” said UDR Chief Financial Officer David Messenger, whose company is the third-biggest publicly traded U.S. apartment owner. “New York has a great economic base, financial center of the world, extremely high propensity to rent, low home affordability.”

Eight apartment buildings below 96th Street in Manhattan were sold or went into contract this year, not including converted or stalled condominiums, according to Real Capital Analytics Inc., a New York-based property research firm. The three largest by price, which are also the most recent, went to buyers who are dropping a multifamily anchor in the borough.

Sagamore, Elektra

In February, LaSalle Investment Management, a Chicago-based private-equity firm, agreed to buy Related Cos.’s 265-unit Sagamore building on the Upper West Side, beating 15 other bidders. The company also has purchased multifamily properties in Los Angeles and Washington, D.C., in the past year, according to Real Capital.

The Elektra, a 166-unit apartment building in the Gramercy neighborhood, also went into contract last month, to buyer Invesco Real Estate, Real Capital said. The Dallas-based company hasn’t owned a multifamily property in the borough since 2004, said Bill Hensel, an Invesco spokesman.

“For several years leading up to the credit crisis, Equity Residential and Archstone were the dominant buyers of rare, large, trophy, luxury multifamily Manhattan offerings,” said Doug Harmon, senior managing director at Eastdil Secured LLC in New York. Harmon represented the owner of 10 Hanover Square, the Witkoff Group, in its deal with UDR, as well as the sellers of the Sagamore.

“These days the playing field is a little more open and a little less predictable,” he said.

Market History

The newcomers aren’t “clouded by their knowledge of history” of the market, which might make them more hesitant to strike a deal, said Robert Knakal, chairman of commercial property brokerage Massey Knakal Realty Services in New York.

“Sometimes you have investors who have been around for decades who turn transactions down, who say, ‘I could have bought that building decades ago for $30 a square foot, why would I pay $700 a square foot today?’’ he said. ‘‘It prevents them from making a move.’’

Longtime apartment owners haven’t abdicated the borough, according to UDR’s Messenger, who said his company competed with Equity Residential on several deals last year.

‘‘We still see all the common players at different sites as we’re entering a building and they’re leaving a building,” Messenger said. “We know that they’re around and they know that we’re around as well.”

Cap Rates

Demand for Manhattan apartment properties has pushed up prices and lowered the yield for investors. Capitalization rates on multifamily buildings in the borough averaged 5.1 percent in the fourth quarter of 2010, compared with 6.6 percent nationally, according to Real Capital. Cap rates, a measure of investment yield, are calculated by dividing a property’s net operating income by its purchase price.

Invesco’s contract to buy the Elektra for $125 million implies a cap rate of 4 percent, according to Real Capital. Invesco’s Hensel said the company doesn’t comment on sales that are pending.

UDR bought 10 Hanover at a cap rate of about 5.3 percent, after capital expenditures and management fees are included, Rob Stevenson and Nicholas Yulico, analysts at Macquarie Group Ltd., estimated in a March 11 report. Over time, UDR may seek to have 10 percent or more of its portfolio in New York City, which would have “a material benefit on the stock’s valuation,” wrote the analysts, who have a ’neutral’ rating on UDR shares.

Rent Growth

“Cap rates for Class A apartments in Manhattan have returned to near-peak levels,” the analysts wrote. “Buyers are betting that a rebounding New York City job market and lack of new supply in 2011 will drive 25 percent cumulative rent growth over the next five years.”

The average monthly rent for a one-bedroom Manhattan apartment increased 8.6 percent in February from a year earlier to $2,535, according to brokerage Citi Habitats. Rents for two-bedrooms climbed 9.6 percent to $3,597, while three-bedroom apartments had an average increase of 12 percent to $4,874. Average rents for apartments of all sizes have recovered 11 percent from their January 2010 low of $2,914.

The apartment vacancy rate declined in February to 1.18 percent from 1.54 percent a year earlier, Citi Habitats said.

Rent Vs. Own

While rents are climbing, New York is the No. 1 U.S. city where leasing an apartment is more affordable than buying a home, according to property website Trulia.com, which compiles data from 50 markets.

At least two high-end Manhattan buildings came to market last month. Developer Gotham Organization is selling its Upper West Side high-rise, the Corner, just a year after construction was completed. Africa Israel USA expects to fetch about $250 million for 88 Leonard St., its tower in the TriBeCa neighborhood that began leasing in 2007, Chief Executive Officer Tamir Kazaz said in an interview last week.

Of the almost 150 would-be buyers who inquired about the property, which includes a fireplace lounge and an outdoor communal whirlpool, many were companies that don’t yet own apartments in Manhattan, he said.

Potential Buyers

“A lot of them are domestic, outside of New York -- Chicago, Atlanta, California,” Kazaz said.

Chicago-based Waterton Associates LLC, which bid on the Sagamore, will probably “take a run at” 88 Leonard, co-founder David Schwartz said in a telephone interview. The investment firm, which owns and operates more than 15,000 apartments in 12 states, has a new $500 million fund that will be leveraged to buy $1.5 billion of apartment assets, the company said in a March 8 statement. Manhattan is one of its targets, Schwartz said.

Waterton Associates entered the New York market in December, when it bought the senior construction loan and mezzanine debt of downtown Brooklyn’s 271-unit Addison apartment complex. The borrower will complete construction on the property and retain ownership, Schwartz said. Waterton will be paid a “preferred return” from the rental profits.

“We have no presence in New York and we felt structuring a debt position in this case was fine for us,” Schwartz said.

‘Tremendous Competition’

“We’ve always been an opportunistic buyer and New York is difficult in that there’s tremendous competition, extremely savvy local players,” he said.

UDR’s purchase of the 493-unit 10 Hanover Square is the largest apartment deal in Manhattan by price since August 2008, when New York University bought the 304-unit Gramercy Green complex for $275 million, according to Real Capital data. LaSalle’s agreement to buy Related’s Sagamore for $140 million is the biggest transaction since last March.

“Both recent deals demonstrate a growing institutional appreciation for Manhattan’s resiliency and the current positive imbalance between demand and supply, which will no doubt lead to strong rental growth over the foreseeable future,” said Eastdil’s Harmon.

UDR has been considering acquisitions in Manhattan for at least two years, according to Messenger. It reviewed the Macklowe collection of three buildings that went to Chicago-based Equity Residential, the largest publicly traded U.S. apartment owner, for $475 million, he said.

UDR officials are “walking up and down the streets looking at different assets,” and plan to buy several more properties in Manhattan soon, Messenger said, declining to specify how many or when.

“You’re going to see us continually monitoring the market,” he said. “One asset isn’t going to be enough for us.”

To contact the reporter on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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