Sector Scorcher

REVIEW SUMMARY
Industry. Commercial Real Estate
Trend. Multifamily property investors are in buy mode, driven by low prices and increased demand for apartments.
Key. There are few active apartment construction projects, which squeezes supply.

Fred Cochran is the quintessential example of just how plentiful the opportunities are for bulk apartment buyers.

In the last 18 months alone, Cochran bought four buildings in the Orlando area with nearly 1,000 apartments out of foreclosure or other financial distress. His firm, Sarasota-based Insula Properties, buys the complexes, fixes up the apartments and rents them out again.

Cochran bought his first complex, Banyan Trail Apartments in Sarasota, mostly with a down payment from $300,000 or so in personal savings. He closed on the 82-apartment property, a few miles east of Interstate 75 of Bee Ridge Road, in July 2009. He paid $3.6 million for it.

A University of Florida M.B.A., Cochran quickly discovered his inner entrepreneur: Cash flow from incoming rents, combined with astronomically low prices for apartment properties, can mitigate the risks in a notoriously tough business — that of being a landlord.

In fact, in late 2009 Cochran quit his a job as a financial analyst for an apartment management firm with properties in Sarasota, Jacksonville and Gainesville to go into business for himself. Insula Properties, named after a Latin term for a block of grouped but separate buildings in Rome, is that firm.

“The whole notion of home ownership isn't for everyone,” says Cochran, “which is good for the apartment business.”

So good, in fact, that up and down the Gulf Coast and even across the rest of Florida, multifamily is the word of the day in markets that move in commercial real estate. The going is so good, says Chip Tatum with the Florida Apartment Association, that the industry has seen an influx of buyers the past year, including many small independents like Cochran.

“There are a lot of new people who have never been in the game before,” says Tatum, governmental affairs director for the Maitland-based association. “People are looking at multifamily because it's the best opportunity out there right now.”

That opportunity is based on sheer supply and demand metrics, says Gleb Nechayev, a senior economist with CB Richard Ellis in Boston who studies the Florida apartment market. Nechayev and several other economists cite several reasons for the trend, from job market woes to the flat economy. “The (apartment) market is certainly improving,” says Nechayev.

More good news for apartment complex buyers: Michael Slater, president of Triad Research & Consulting in Tampa, which specializes in the multifamily market, thinks the current environment has some significant strength. Says Slater: “We see the trends in the multifamily market being strong for another three to four years.”

Rental rates

The trend also stretches nationwide, based on a flurry of new reports and surveys on national apartment data.

For starters, the U.S. apartment vacancy rate dropped to the lowest point in three years in the 2011 first quarter at 6.2%, according to Reis Inc., a New York City-based commercial real estate analysis firm. The rate dropped from 6.6% in the 2010 fourth quarter and from 8% a year ago.

The squeeze in supply has given way to increased rents. The general rule there is landlords will increase the price when occupancy rates in a market surpass 90%.

On the Gulf Coast, 13 out of 19 submarkets had occupancy rates of at least 90% through the first two quarters of 2010, according to the CB Richard Ellis mid-year MarketView report. Rent increases in many of those markets have followed the occupancy uptick, says Nechayev.

And on a nationwide scale, apartment rents rose 1.1% in the first three months of 2011, suburban Dallas-based apartment data firm MPF Research reports. Rents have now climbed 3.3% over the past year, MPF reports.

“Occupancy rates in the apartment sector have tightened enough to give owners and managers quite a bit of pricing power,” MPF Vice President of Research Greg Willett says in a statement. “With minimal new supply coming to market, competition for the best existing developments is very limited.”

An increase in both rents and occupancy also traditionally means a boom in development isn't far behind. But the boom-and-bust cycle hasn't yet swung back to building in any big way — a fact apparent in the lack of apartment construction activity on the Gulf Coast.

The Lost Creek Resort Apartments complex in east Manatee County, for instance, is the first apartment building to break ground for actual construction in the county since 2005, local officials say. Winter Park-based P.A.C. Land Development Corp. is behind that project, planned at 272 units.

'Sticks and bricks'

Cochran and other Gulf Coast apartment investors see opportunity in that lack of construction, and those taking part comes from a diverse range of investors. (See box, left.)

Price is the main driver for the Insula Properties business model, says Cochran. Makes sense, given what he's paid for some properties.

Last year, for example, Insula bought two large complexes in Orlando. The firm paid $6.1 million for a 360-unit complex and $9 million for a 320-unit complex with more amenities. That breaks down to $16,944 per unit in the first complex and $28,125 per apartment in the second property.

The financing options in the $5 million to $10 million price range, says Cochran, are surprisingly abundant. Indeed, nearly a dozen banks and lenders are competing for Cochran's business on a current deal.

And at these prices, Cochran can afford to farm out renovation work and property management. Then, at market rate rents, anywhere from $500 a month to $900 a month depending on the amenities at the complex, Cochran can generate some solid returns.

It helps even more, says Cochran, that he has only bought properties from banks out of foreclosure, or in one case, a short sale. The length and diligence involved in the foreclosure and short sale process eliminates some would-be competitors. “The banks are not as much interested in price,” says Cochran, “as they are that it's going to close.”

Cochran hopes to grow Insula Properties in several ways the next few years. He'd like to eventually bring property management for some complexes in-house, to save costs and have more control. He'd also like to buy additional complexes with a total of 5,000 units by 2014.

That year is when Cochran projects the market will begin to tip back the other way. Until then, he plans to keep acquiring, renovating and renting.

“We just do sticks and bricks,” says Cochran. “It's a pretty simple business.”

Diverse deals

The bulk apartment acquisition trend on the Gulf Coast is diverse.

Buyers in recent deals come from Argentina, California and Massachusetts, among other places. Properties bought span from trendy neighborhoods in Tampa, like Hyde Park, to highly populated sections of Naples. And buyers range from national investment funds to independents like Cochran with Insula Properties.

Some examples of deals that have closed within the last two months include:

• Tampa-area investor William Sultenfuss purchased the Green Oaks Apartments on Interbay Boulevard in Tampa. Sultenfuss paid $2.35 million for the 100-unit, bank-owned complex in an all-cash deal. Sultenfuss, who is on the board of Clearwater-based USAmeriBank, has bought and sold several apartment complexes in the Tampa area over the past few years;

• Covenant Capital Group, a Nashville-based real estate private equity firm, bought the Crosswinds Apartments complex in St. Petersburg. The firm, through its Covenant Apartment Fund VI, paid $13.1 million for the 208-unit complex;

• A Newport Beach, Calif., family-run investment firm purchased the Palm Vista Apartments in Fort Myers for $2.5 million. The gated complex has 136 units;

• Argentinean investors, through a limited liability company in Miami, purchased a 104-unit complex in Naples. The investors paid $2.2 million for the complex, River Park Apartments;

• A Massachusetts realty investment group bought a 299-unit complex on Manatee Avenue in west Bradenton for $11.93 million. The firm, Agawam, Mass.-based Alcurt Realty Group, bought the complex from Wells Fargo, which foreclosed on the property earlier this year;

• Tampa-based Garrity Land Development Group purchased the Hyde Park Pointe apartment complex for $1.9 million. The 32-unit complex is on Armenia Avenue.

John Garrity II, managing member of the group, told the Business Review after the sale that his firm will aggressively follow the multifamily trend.

Garrity said the group hopes to add another 400 units to the portfolio in the next 24 months.