Investors continue to shop in the Wilmington area for apartment communities, enticed by the promise of attractive returns as occupancy remains high and rents keep going up.
The trend means local apartments are fetching high prices.
After a portfolio purchase in a venture with Blackfin Real Estate Investors, New York-based Clarion Partners now owns three Class B apartment communities in the Port City. Excise taxes on deeds recorded May 26 indicate sale prices of more than $100 million for 360-unit Cape Harbor, 7113 Cape Harbor Drive; $95.2 million for 364-unit Mill Creek, 414 Mill Creek Court; and $67 million for 288-unit Clear Run, 5300 New Centre Drive.
The seller was a partnership between real estate firms CARROLL and PGIM Real Estate, the real estate investment and financing business of Prudential Financial Inc. (NYSE: PRU). The Wilmington properties were three of 12 multifamily communities in the portfolio, with a total of 3,564 units across Florida, North Carolina and Tennessee priced at $885.5 million, according to a news release by the seller.
In property tax records, the last recorded sale prices for the Wilmington properties were about $41 million for Cape Harbor; $40 million for Mill Creek; and nearly $33 million for Clear Run. Efforts to reach buyer and seller representatives for more details about the transactions were not immediately successful Wednesday.
Why here?
The seller's news release painted a detailed picture of why the properties, including the Wilmington apartments, were so attractive to investors.
“Across Portfolio metros, Class B apartments are outperforming all other classes. Many newly constructed and higher-rent alternatives are reaching affordability limits. Moderate-income renters provide a stable revenue base, as they are less likely to move and purchase single-family homes, while having the ability to afford market rent growth,” the release stated. “High barriers to entry exist for Class B in suburban locations due to zoning restrictions, land availability, and unattractive economics for new development (i.e. rents do not justify construction costs).
“At the same time, many of the new jobs being added to the Portfolio’s local economies produce moderate income. In the Portfolio’s metros, the employment growth rate has been 3.75x higher on average than the inventory growth rate for Class B properties.”
Clarion Partners managing director Thomas James said the purchase strengthens his firm’s position in Sun Belt markets “and also gives us exposure to a high-growth portfolio of seasoned multifamily properties which we can own below replacement cost and renovate for yield enhancement.”
In many cases, Class B apartments are "slightly older properties that could use just a little sprucing up," said Mark Johnson, executive vice president and sales manager for Wilmington-based Coldwell Banker Commercial Sun Coast Partners, which was not involved in the May apartment deals mentioned in this article. "Instead of gutting them, there’s usually just some flooring updates, maybe some new fixtures. Of course these don’t have as large of an upside in rental increases, but they also don’t require as much capital infusion as a true value-add deal."
'Strategic' upgrades
In a deal recorded by the New Hanover County register of deeds May 16, real estate firm Madison Marquette closed on Crosswinds, a 380-unit apartment community at 1108 St. Andrews Drive, in a $77 million transaction, the deed showed.
The closing was part of Madison Marquette's Evergreen Multifamily Value Add Fund, according to a news release, and the fund "plans to complete strategic unit upgrades that will provide higher quality hardware and finishes including appliances, flooring, and counter tops. It will also improve the community’s amenities, perform exterior aesthetic work and landscaping."
Madison Marquette officials also pointed to Wilmington's growth as a factor in their investment.
“The Wilmington growth story is extremely compelling for multifamily investment,” said Nigel Keenan, principal over housing investments of Madison Marquette, in the release. “We believe our targeted renovation program will provide residents with high-quality housing and amenities while providing great work-life balance due to the close proximity to various amenities while achieving our Fund’s goals of buying differentiated real estate in compelling growth markets.”
According to Apartments.com, the current rent range at Crosswinds apartments is $1,065-$1,470. RentCafel.com says the average rent in Wilmington is $1,492.
Boom times
The transactions make sense to local commercial real estate brokers with experience in apartment community transactions.
“The world has figured out that tertiary markets like Wilmington can provide much higher cap rates and thus returns than primary and secondary markets like New York or Charlotte,” Johnson said.
The Wilmington area is growing with relocations from the Northeast, California "and other expensive or otherwise challenging markets (think cold weather/fires/drought). Our affordable cost of living, lower taxes and temperate climate all combine to drive people here. Investors need this dynamic where they invest, so it’s a perfect storm for us here," he said.
While existing residents often lament the number of apartments on the rise in the Port City, every new project has stabilized very quickly, Johnson said, and many have sold multiple times in recent years.
"Of course the boom in self-storage units follows this growth closely. Until we start seeing slow lease-up/rents declining, I think the multifamily market segment will continue its construction boom," he said. "While multifamily as a concept helps with our workforce housing shortage, these substantial rent increases are limiting its effectiveness to serve that population – but it’s a start for those that aren't able to come up with a down payment."
