2 Maryland Apartment Properties Sell As Investors Pile Into Suburban, Class-B Segment
Suburban, Class-B apartments were a hot asset class before this year, and they have become even more appealing to investors during the coronavirus pandemic, with two Maryland properties trading hands over the last week.
Turner Impact Capital sold the 599-unit Regency Pointe property to Quantum Equities for $80M. The garden-style apartment community sits at 3253 Walters Lane in Forestville, roughly a mile inside the Beltway in Prince George's County.
LCOR and Ares Management sold the 256-unit Montclair Apartment Homes property to Priderock Capital Partners for $58.7M. The property at 3525 Sheffield Manor Terrace is in northern Silver Spring, near the interchange of Columbia Pike and Route 200.
Transwestern's Dean Sigmon, Robin Williams, Justin Shay and Michael D'Amelio represented the sellers in both deals. The team also brokered two deals in November: a $49.5M sale in Silver Spring and a $46.3M deal in Glen Burnie, Maryland.
Last year, brokers said they were seeing an unprecedented level of investor demand for D.C.-area apartments, especially the suburban, Class-B segment, and that has continued this year despite the pandemic. While there was a brief pause across the market after the pandemic began, Sigmon said the multifamily investment sales market started to heat up over the summer.
"What we witnessed during the pandemic is we saw a huge pent-up demand boiling over, starting in June," Sigmon said.
Williams said the strong investor demand for suburban, Class-B apartments has been a response to the shift in renter preferences.
"It does seem as if renters have shown a little bit more preference for that product type in this COVID environment," Williams said. "That product type seems to have fared better in collections, occupancy and general property performance than the downtown, Class-A urban assets."
The suburban Maryland Class-B apartment market had a 2.1% vacancy rate as of September, and rents remained flat over the previous 12 months, according to Delta Associates. The District's Class-A apartment market, by comparison, had a 7.8% vacancy rate and experienced a 10.7% rent decline over the previous 12 months.
Quantum Equities Senior Vice President Paul Bellantoni said the firm is planning to launch a major renovation of the newly acquired Regency Pointe property. He said it is focused on buying suburban apartments that are more affordable than the Class-A segment of the market.
"There's such a strong demand from the prospective resident side," Bellantoni said. "If they go into a newly constructed Class-A apartment, usually it's hundreds of dollars more a month to rent that, but if you give them a high-quality alternative at a lower cost, they're still getting the aesthetic appeal but at a more palatable value."
This apartment segment is especially attractive to investors this year given the challenges facing retail, hospitality, office and other commercial real estate sectors, Williams said. Additionally, he said buyers can get favorable debt terms for suburban, Class-B apartments.
"I would say the best debt terms available are for this Class-B, suburban product type," Williams said. "They have better loan rates if they fall into these categories with a component of affordability relative to average household incomes. There's just better property performance, which allows people to get better debt terms."
The majority of the buyers looking at apartments in the D.C. suburbs are out-of-town investors, Williams said, with a large concentration from the New York market.
"New York specifically last year had some heavy impact from rent-control legislation that had a negative impact on property values, and that was really exacerbated by COVID, with New York experiencing a lot of people exiting the city and seeking less dense living environments," Williams said. "We ended up with a lot of New York family shops and long-term owners of real estate in New York that are looking at areas outside of the city to make acquisitions."
Quantum Equities, based in New York, began investing in other markets in 2017, before the rent-control law and the pandemic, Bellantoni said, but he has seen more investors follow suit over the last year.
"We chase after deals in markets where we see that there's an opportunity," Bellantoni said. "We started purchasing outside the city back in 2017, so we're going to continue to look to where the opportunity lies."
Bellantoni said he sees opportunity in the D.C. market, and Quantum Equities is looking at more potential acquisitions in the area.
"When it comes to the D.C. area, we're very comfortable with the market because we spend a lot of time studying the market and understand it very well," Bellantoni said. "We understand what people are looking for. We understand the assets, and a lot of them were built around the same time and share a lot of similar qualities, and we understand those qualities very well. So it just makes sense for us to spend time and effort growing in this market."
The strong demand for suburban, Class-B apartments has pushed up pricing levels to all-time highs, Sigmon said. The average sale price for Class-B apartments in the D.C. area through the first nine months of this year was $215K per unit, according to Delta Associates, compared to $194K per unit during the same period last year.
Williams said the rising prices have contributed to many owners' decisions to sell their properties.
"We're starting to see more sellers recognizing the pricing that's achievable, and that's pushing some people to consider a sale," Williams said.
LCOR Vice President of Asset Management Kieran Bryers said the strong investor demand for these types of multifamily properties played a role in its decision to sell the Silver Spring property, and it was able to achieve positive returns on the sale.
"Over the summer, we realized there was a high demand for stabilized, workforce housing, but multifamily buying options were few and far between,” Bryers wrote in an emailed statement. “With a limited number of properties in this category listed for sale at the time, we decided to seize the opportunity and move forward with a disposition strategy for Montclair Apartment Homes."
As long as suburban, Class-B apartment owners keep bringing properties to market, Williams said, there will be investors looking to buy them.
"This seems to be the sweet spot for the multifamily investment community right now, and I'd say this trend will probably continue," he said.