Investors continue to pay a high price for apartment buildings in many parts of the country, despite growing political support for rent control measures that could make this business riskier.
Norfolk, Va.-Based real estate investors Harbor Group International LLC bought a portfolio of 13,243 apartments in eight southern and mountain states worth $ 1.85 billion, one of the largest multi-family purchases of the last decade, at the beginning of the month.
Kushner Cos., The family business of White House senior aide Jared Kushner, also agreed this month to buy 1,058 units in a deal valuing the apartments at $ 266.5 million.
Both companies say they plan to generate profits by raising rents, a strategy that is under attack by lawmakers across the United States.
Local governments in New York and states like California and Oregon have tightened rent controls or introduced new limits on annual rent increases for most properties over the past year. These efforts weighed on sales and prices in New York City, where the dollar volume of rental apartment sales fell 51% in the third quarter, and weighed on values and trade in other markets that have seen rent measures adopted or extended.
But in markets where lawmakers aren’t making or pushing for rent rules, construction prices have remained at record highs even after more than a decade of steadily rising prices.
Nationally, investors paid a record average of $ 158,296 per apartment in the third quarter of 2019, compared to $ 151,766 for all of 2018 and $ 106,074 in 2012, according to Marcus & Millichap.
“We’ve all been waiting for the other shoe to fall one way or the other,” said Hessam Nadji, managing director of the commercial real estate company. “This does not happen.”
Some investors are looking to areas of the country that face little or no restrictions on rent increases. The Harbor Group deal, for example, included 36 properties, mostly in the Sunbelt states, from Arizona to Florida, where rent control issues have not progressed much. Six of the seven properties that Kushner Cos. buys are located in New Jersey, which does not have a statewide rent control law.
Rising rents has become a politically charged issue as more and more people struggle to keep up. The average effective rent, the amount paid after discounts, in about 80 markets tracked by data company Reis Inc. was $ 1,426 in the fourth quarter of 2019, up 44% from the fourth quarter of 2010.
Investors expect rent increases to continue to outpace inflation in many parts of the country as housing production remains below record levels. In December, housing starts, including single-family homes and apartment buildings, were at a seasonally adjusted annual rate of 1.61 million, according to the Census Bureau. In 2005, by comparison, they were 2.07 million.
“We are not producing enough housing in this country,” said Bob Faith, founder and CEO of Greystar Real Estate Partners, one of the largest owners, operators and developers of multi-family housing in the country. “It continues to drive up rent levels.”
The rent increases are part of the strategy of Harbor Group and Kushner in their recent agreements. The average rent for the units that Harbor has purchased now is about $ 1,000 per month. But the company reckons it’s well below market rents, in part because unit interiors haven’t been upgraded in years, Harbor Group chairman Richard Litton said.
Harbor plans to invest an average of $ 6,745 per unit for upgrades such as new appliances, light fixtures and flooring. Comparable apartments in the same markets that have undergone such upgrades are currently charged up to 22% more than those in the Harbor portfolio, Mr Litton said.
Kushner Co.’s business plan focuses in part on the good locations and proximity to public transport of the seven complexes it is buying, according to President Laurent Morali. But he also plans to increase rents, which now average $ 2,000 per month, by about 3% per year, he said.
Kushner will also modernize the apartments to charge higher rents based on market conditions. Mr. Morali said it would be worth investing around $ 10,000 per unit if it allowed the company to increase its annual rent by $ 2,000.
“If you can get your money back over five years, that’s a good return on your investment,” he said.
Apartment industry executives predict that 2020 will be another strong year for sales and development. Greystar, for example, will likely spend around $ 2 billion on new acquisitions in the United States, about as much as in 2019, and $ 4 billion on launching new projects in the United States this year, up from about $ 2.5 billion in 2019, Faith said.
Yet leaders are wary of advancing rent control. Outbreaks are also underway in Chicago and Puget Sound in Washington state, said Nadji, of Marcus & Millichap.
“The rent control drum is beating louder and louder,” he said.
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