Suburban apartment deal biggest in over a year
(Crain's) — A New Jersey apartment investor is paying about $60 million for a 592-unit property in Buffalo Grove, the largest apartment sale in more than a year amid a lethargic Chicago-area investment market.
Penobscot Corp. is expected to close this month on Amli at Chevy Chase, an apartment complex at 1701 Johnson Drive developed in 1988, say sources familiar with the transaction. The Teaneck, N.J.-based firm, which owns six apartment complexes in the Chicago suburbs, is acquiring the Buffalo Grove property from Chicago-based apartment investor Amli Residential.
The sale could help reawaken the investment market for large local apartment buildings, which has been largely dormant since the financial crisis hit last year. The lack of recent transactions has made it hard for investors to value properties, one reason buyers and sellers have been so far apart on price. A few sales could help close that gap.
"We're optimistic that the data points will provide people with a sense of where the market is settling," says John Jaeger, first vice-president in the Chicago office of CB Richard Ellis, which isn't involved in the transaction.
Just two local apartment properties over $10 million have traded in the Chicago area this year, for a combined $28.9 million, according to CB Richard Ellis. That compares with $702.3 million in sales through the first six months of 2008.
At roughly $60 million, or $101,000 a unit, the estimated sale price of Amli at Chevy Chase is about 30% below the original asking price of $85 million, or $144,000 a unit. But the sale still would be the largest local apartment transaction since the 283-unit Park Evanston in downtown Evanston sold for $101 million in January 2008. Amli paid about $45 million, or $76,000 a unit, for the Buffalo Grove property in 1996.
Amli and Penobscot representatives did not return phone calls for comment. An executive at Apartment Realty Advisors, the broker in the transaction, didn't return a phone call.
Penobscot already owns one apartment complex in northwest suburban Buffalo Grove, the 352-unit Wheatlands, according to Web site ForRent.com. It also owns two apartment buildings in Schaumburg and one each in Arlington Heights, Downers Grove and Naperville.
The firm is boosting its presence in a suburban rental market that has turned against landlords as the recession has deepened in the past year.
The suburban occupancy rate fell to 91.3% in the first quarter, down from 93.3% in first-quarter 2008, while the median net effective rent fell 6.1%, to $1.07 a square foot, over the same period, according to Chicago-based real estate consulting firm Appraisal Research Counselors. Median net effective rent includes concessions like free rent.
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Amli at Chevy Chase, considered a Class B property, was 92.9% occupied in the first quarter, down from a peak of 99.8% in first-quarter 2007, according to Appraisal Research. Net rent at the property was $1.41 a square foot after hitting a high of $1.58 a square foot in fourth-quarter 2008.
The deteriorating leasing market, combined with a tighter lending climate, have kept many investors on the sidelines and driven property values down from 2007, when the real estate investment market peaked. Mr. Jaeger of CB Richard Ellis estimates apartment values will fall 20% to 40% from the peak to trough, with lower-quality properties suffering the biggest drops. He believes values are close to scraping the bottom already.
Landlords with financial staying power will likely wait for the market to recover before considering a sale, while those that need to raise cash will be under pressure to sell. Mr. Jaeger estimates that 18 apartment properties worth about $340 million are up for sale, down from more than $700 million earlier this year.
The good news is that government-sponsored agencies Fannie Mae and Freddie Mac have continued lending to apartment investors, easing the impact of the credit crunch and providing some price support. But interest rates have started climbing again, boosting borrowing costs for acquirers. And rents and occupancies are expected to keep sliding, which won't help prices.
Still, the sale of the Amli property, combined with a couple others expected to close in the next month, are good signs, indicating that the market is starting to clear, Mr. Jaeger says.
"We're suggesting that we've maybe turned the corner," he says.
