Flying under the radar, the Carlyle Group has assembled a half-billion-dollar portfolio of small apartment buildings in Brooklyn.
In the past year, the private equity giant has purchased more than 130 in red-light districts such as Bushwick, Bedford-Stuyvesant, Park Slope and Cobble Hill, according to sources and an analysis of property records by The real deal.
It’s one of Wall Street’s biggest moves in family ownership and an unusual approach for a company that raised an $8 billion real estate fund in December.
In many cases, Carlyle is buying these buildings one at a time, writing the kinds of $2 or $3 million checks common to small investors who dominate the space.
“Typically these owners are small to mid-sized operators who bite what they can chew,” said Michael Tortorici of commercial brokerage Ariel Property Advisors. “It’s not often you see people looking to amass massive wallets.”
A Carlyle spokesperson declined to comment. People familiar with the company’s strategy said it targets a specific type of building that falls under the city’s 2A/2B tax designation, which limits property tax increases to no more than 8% per year. . These properties have no more than 10 units and tend to be mostly free market, avoiding the harsh restrictions imposed on landlords by the Rent Stabilization Act of 2019.
And because they lack amenities such as doormen and elevators, the buildings have relatively low operating costs.
This type of predictable, high-margin investing is becoming increasingly attractive to institutional players willing to endure the tedious work of building large portfolios, one small building at a time, according to Rich Velotta of commercial brokerage Raven Property Advisors. .
Moreover, he says, there is no easy alternative.
“If you’re someone like Carlyle and you’re looking to invest some capital, it’s hard in the tighter markets of Brooklyn and Manhattan to find a large-scale multifamily that isn’t stabilized in the rent,” Velotta said. “It’s probably due to a function of necessity.”
These small buildings have traditionally been stepping stones for first-time homeowners.
“These are often kind of an entry point for new investors,” Tortorici said. “They’re not too big financially or operationally, so people are looking to fix them and then sell them and move on.”
Carlyle’s U.S. property manager Jason Hart and director Wonjoong Kim took a big step into the space in December, when the company partnered with owner Greenbrook Partners on a portfolio of around 45 buildings.
Greenbrook, led by Greg Fournier, had recently gone on a shopping spree in Brooklyn, but was attracting unwanted attention. Tenants of Greenbrook-owned buildings in Park Slope cried foul last year when their landlord refused to renew their leases on open market apartments.
The move came as Wall Street drew attention to single-family home buying, and then-City Councilman Brad Lander and U.S. Senate Majority Leader Charles Schumer publicly denounced Greenbrook.
Lander, now city comptroller, said he hadn’t heard any similar complaints from buildings owned by Carlyle. But he objected to the encroachment of private equity investors “who focus on making short-term profits at the expense of long-term tenants…accelerating the affordability and stability crisis of the housing in our city” and continued his call for “a good cause”. expulsion.”
Greenbrook did not respond to requests for comment. Immediately after the initial negative publicity, the company said it would speak to tenants about lease renewals. (This May, Mother Jones published an in-depth investigation of the business, documenting the experiences of tenants in its building as part of a series called “How Private Equity Plundered America.” The publication identified ties to Carlyle on three dozen of his properties, but TRD analysis reveals a much bigger bet.)
After partnering with Fournier, Carlyle shopped around buying real estate across Brooklyn and also bought a few in Queens. This month, the company landed a $500 million mortgage from Invesco, secured by the properties.
While Carlyle may be the biggest name to play for 2A/2B buildings, it’s not the first. And investors are paying more attention to space.
Highpoint Property Group, led by former Naftali Group executive Drew Popkin, has been collecting these small buildings since 2017.
Highpoint recently put a 20-building portfolio with 146 units in Chelsea, East Village and Cobble Hill/Brooklyn Heights on the market with an asking price approaching $300 million, according to a source.
Marketing materials from Meridian Investment Group, which is handling the sale, highlight the buildings’ benefits and their “unique protections offered only by NYC tax class 2A/2B properties.”
Carlyle seems more willing to make smaller deals than his peers, who tend to get big.
Blackstone, for example, paid $930 million in June for 76-story 8 Spruce Street rental tower in Manhattan, and KKR has spent about $1 billion over the past two years buying relatively tall new buildings in Brooklyn with the Wrublin family’s Dalan Management.
And while Carlyle in March struck a deal to buy an 18 million square foot portfolio of net leased properties from iStar for $3 billion, its New York deals have been more modest — except when considered in their whole.
In October, the company paid $34 million to buy a 40-unit loft in Clinton Hill. In November, he bought a new 175-unit rental property in Queens at 22-22 Jackson Avenue for $85 million.
Carlyle plans to build a three-story self-storage facility in Crown Heights on property it bought for $13 million in 2020.
It’s unclear what the company has in store for its tax-protected portfolio. Some observers have speculated that the company might use the typical private equity model of building a portfolio to sell down the line.
Blackstone and KKR have also launched unlisted REITs that allow retail investors to buy into their portfolios.
Shimon Shkury, chairman of Ariel Property Advisors, said investor interest in the 2A/2B buildings was growing.
“Because they’re protected by a tax class, there’s a premium that investors are willing to pay,” he said. “You know your taxes are going to stay stable for the foreseeable future, and in an inflationary environment like today, they could also be considered inflation hedges.”