Tuesday, February 19, 2019

Once Again, Cheap Apartments Show Big Appeal

In another sign that investors see big value in cheaper apartments, Morgan Properties has struck a deal to buy 15 older rental complexes in the suburbs around Philadelphia, Baltimore and Washington, for $1.4 billion.

Morgan, of suburban Philadelphia, has been one of the most aggressive buyers of “workforce housing” in the Mid-Atlantic in recent years. Now, they’ve struck a $1.4 billion deal for 6,696 apartments, mostly of 1960’s and 1970’s vintage.

That’s Morgan Properties’ specialty – “workforce housing” that caters to mid-income renters and has the potential for higher rent growth than the newer, higher-rent rentals in those markets. With cheaper rents than the fancy new developments popping up in those markets’ downtowns, the older communities have a natural pool of potential tenants among lower-income renters.

And by making modest improvements to the apartment interiors and the community amenities, Morgan could raise rents to boost their own returns on the investments. The strategy is becoming increasingly popular, as very little of the tsunami of new apartment development is aimed at middle-income renters.

The deal is the biggest single pick-up ever for Morgan, an apartment management and investment firm founded in 1985. But the company has shown an appetite for big deals, especially those involving Class-B properties with upside potential.

Since 2013, the company has picked up about $3 billion in apartments before the Lone Star deal. The vast majority of Morgan's rentals are in the Mid-Atlantic, but the company has acquired rentals in Tennessee and as far west as Nebraska, and as far south as South Carolina. The firm now owns more than 30,000 apartments.

Just two weeks ago, Harbor Group International made a similar big investment in workforce housing. The Norfolk, Virginia-based shop paid $380 million for a six-property, 1722-apartment portfolio in suburban Massachusetts. They too appeal to the renter priced out of the gleaming towers now littering downtown Boston and its close-in suburbs. And they too offer their new owners the potential for larger rent increases through property upgrades.

The deal with Lone Star has yet to close and details could change, last minute. But market players familiar with the deal say Morgan is under contract for the portfolio and will pay slightly more than $210,000 per unit.

Morgan’s new portfolio will include the 1,387-unit Mount Vernon Square Apartments, at 7429 Vernon Square Drive in Alexandria, Virginia. It was developed in 1965, and is the largest in the portfolio acquired from Lone Star. The Home Properties of Bryn Mawr, at 105 Charles Drive, in Bryn Mawr, Pennsylvania, is the oldest property. That 316-unit property was built in 1940.

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