Contact Us
News

Outside Investors Say D.C.'s Class-B Multifamily Market Is 'Where The Party's At'

With the rapid development of D.C. apartments preventing owners of new buildings from raising rents, outside investors looking to buy into D.C.'s multifamily market are increasingly attracted to suburban, Class-B communities.

The apartments at Mark Center
The Apartments at Mark Center in Alexandria that Morgan Properties acquired in August

Morgan Properties owned about 4,000 units in the D.C.-Maryland area in 2012. Following a rapid acquisition spree over the last five years, it now has six times that. With a 24,000-unit footprint, the D.C. region now makes up more than half of the Philadelphia-based investor's portfolio. 

That growth has been highlighted this year by Morgan Properties largest-ever acquisition. In August it bought Alexandria's Mark Center portfolio from JBG for $509M. 

"We've been rapidly scaling up throughout the Maryland and D.C. corridor, it only made sense to be on the other side of the Beltway to have a stronghold in the D.C. market," Morgan Properties President Jonathan Morgan said. "Northern Virginia has been a market we've highly coveted. It just depended on finding the right opportunity to strike."

The right opportunities, from Morgan's perspective, are large, Class-B apartment portfolios in suburban areas where the investor can add value. There is a large enough gap between Class-B and Class-A rents, Morgan said, that his company can renovate the properties to capture rent increases while remaining affordable to working-class renters and not having to compete with newer buildings. 

Morgan Properties Jonathan Morgan
Morgan Properties President Jonathan Morgan speaking at a company event

Morgan Properties is not alone in pursuing that strategy. Through the first nine months of 2017, 11,042 Class-B apartment units have sold throughout the D.C. Metro area for a total of $1.9B, according to Delta Associates. That represents 40% more investment sales volume than the entirety of 2016, during which 8,441 units sold for $1.35B. 

"From our standpoint, Class-B is where the party's at," Morgan said. "We are buying existing structures with a value-add strategy. We don't develop. The reason we've been growing so quickly in Maryland is it's been working. It's rinse, recycle, repeat."

The main reason Morgan has focused its growth so heavily on the D.C. region has been the number of opportunities available. Many of the large, Class-B communities it seeks out in the D.C. area are owned by funds — like the JBG fund that owned the Mark Center portfolio — that typically want to sell quickly. 

"What we found is in the Maryland and D.C. markets, it's more of an institutional market, so opportunity funds own all the product, as opposed to other areas such as Philly and New Jersey where it's all family-owned," Morgan said. "Given the deal flow and that funds have five- to seven-year holds, it has led to more opportunities."

The company plans to continue growing its footprint in the region. Morgan said he is looking at more opportunities in Alexandria, plus other parts of NoVa, like Annandale and Centreville, and several Maryland submarkets. But he thinks the pace of deals might slow down a bit, given the increased competition among investors for Class-B properties. 

Until now, Morgan had not seen much competition for deals, he said, especially given the size of the communities it is looking to buy. Morgan said his company has not considered anything smaller than 500 units, whereas most of the activity has been in the 200- to 300-unit range. But with the market fundamentals increasingly favoring Class-B investment, Morgan said he expects more larger players to get into the game.

"As yields go up and interests rates rise, I could see more institutional investors getting into Class-B," Morgan said. "Eventually they're going to chase yield."

Reston Glen
The Reston Glen apartments at 12265 Laurel Glade Court

New York-based Pantzer Properties has also had an active year of acquiring properties in the D.C. suburbs. The investor has been buying properties in the region throughout its 46 years of existence, co-President Jason Pantzer said, and it now has about two-thirds of its portfolio concentrated in the Baltimore-Washington area.

In February, Pantzer bought the 200-unit Reston Glen apartments for $32M. Also this year, it has acquired a 576-unit Manassas community for $115M, a high-rise apartment building in Ashburn for $96M and a multifamily property in Silver Spring for $39.6M.

Pantzer said the company likes the D.C-Baltimore region because of its accessibility to mass transportation, the strong job market and the ability to drive rents. He said Pantzer likes Class-B properties that are still in quality condition, but where it sees opportunity to add value.

"We want to make sure that the Class-B's we're looking at are well-located with physical attributes like large unit sizes, low density per acre, good ingress and egress, where we think we can go in and enhance what's there," Pantzer said. 

Given their relative affordability, Pantzer said Class-B apartments can be easier to lease and can be more stable through a recession. He also said acquiring these types of properties is attractive because of the surge of new Class-A construction.

"Some of the Class-A stuff is very hard to compete with," Pantzer said. "Certainly there is a substantive rent differential that needs to be qualified ... Ultimately, lower renter rates should give you a better pool of renters."

Morgan and Pantzer will both discuss their multifamily investment strategies at Bisnow's BMAC East event on Nov. 28 at the Renaissance Washington D.C. Downtown Hotel.