Crain's New York Business, August 04, 2003

REIT INVADES NY APARTMENTS
 

In a move that could touch off a broad incursion by national real estate firms into New York's residential market, the country's largest publicly held apartment landlord is on a buying blitz in the city.

Denver-based Apartment Investment and Management Co. has bought or is about to buy 13 buildings in Manhattan, with a total of 220 apartments. In the meantime, it is in talks to acquire a 1,500-unit portfolio in Queens and a building in midtown.

Real estate investment trusts have steered clear of investing in the city's rent-regulated housing stock because of the complexities of operating these properties. But the potential for profit here now outweighs the pitfalls of investing in America's largest apartment market.

With the country's highest rents, and occupancy rates that have held up far better than those in other cities in the past couple of years, New York looks exceptionally attractive.

Aimco's entry into the city is part of its effort to fill in the gaps in a corporate empire that consists of 313,000 apartments in 1,760 buildings spread throughout 47 states, the District of Columbia and Puerto Rico.

"We made an assessment and saw that we are underweighted in several key apartment markets," says Harry Alcock, the company's chief investment officer. "We've increased our presence in Southern California and Boston-and now it's time for Manhattan."

In other cities, the company achieves critical mass by acquiring 3,000 to 5,000 units, he says. Because rents are so high, the magic number in New York will probably be lower.

If Aimco's campaign to build a New York presence proves successful, it will likely pave the way for other "foreigners," as real estate brokers sometimes refer to non-New York-based investors in multifamily buildings.

While three other residential REITs came into town last year, they sidestepped many of the complexities of the rent-regulated market either by constructing their own luxury buildings or buying brand-new ones.

Atlanta's Post Properties Inc. built two upscale towers on the East Side. AvalonBay Communities Inc. of Alexandria, Va., produced a waterfront high-rise at Queens West. Englewood, Colo.-based Archstone-Smith Trust purchased a tony property near Lincoln Center that had just been built by Jerry Speyer, the owner of Rockefeller Center.

Horse of different color

Aimco is altogether different. It buys rather than builds. It focuses on middle-market properties, which in New York means the more than 1 million rent-regulated apartments that outsiders find so confounding. After all, managing them requires mountains of paperwork and constant vigilance-sometimes with video cameras and private detectives-to ensure they aren't being sublet illegally.

"It's a matter of street smarts," says broker Adelaide Polsinelli of Besen & Associates Inc.

Despite all the complications, Aimco executives think they can make a go of it here because they've spent 18 months educating themselves about the nuances of the market. "Now we're comfortable that we understand the regulatory environment and the economics of operating apartments in New York," Mr. Alcock says.

It's worth the trouble to learn the ropes. The city's rent-regulated properties have long been hotly sought-after by local investors for their predictable rent increases and the chance that they offer landlords to boost revenues substantially when tenants move out. The state law that covers rent regulation was renewed and extended for eight years, and hundreds of thousands of apartments are expected to be deregulated in that period.

"These buildings are a no-lose proposition, unless you over-leverage at the top of the market," says broker Benjamin Shafran of Capin & Associates.

As part of its acquisition strategy, Aimco has lined up an entree to local landlords by hiring Georgia Malone as a buyer's broker. Ms. Malone, the president of brokerage Georgia Malone & Co., has a network of relationships with property owners that dates from the years she spent as their lawyer handling landlord-tenant litigation.

In another sign of how much Aimco has learned in its study of the market, it has modified its normal purchasing criteria in order to get a foothold in New York. In other cities, it looks for buildings with at least 200 apartments apiece. Its first purchase here was a $5 million pair of walkup buildings at 311-313 E. 73rd St. that have just 35 apartments in all.

The REIT did the deal to introduce itself to sellers Alan and Jeffrey Manocherian, in the hope of buying other properties from them later.

While the company is willing to compromise on size, it pushes for prime locations. A five-building package that Aimco is closing on this month is a good example of the firm's preferences. The landmarked 1880s properties occupy a full blockfront of Columbus Avenue between West 68th and West 69th streets, just north of Lincoln Center. They are being sold by investor Ivor Bracka for $37.5 million.

Attractive extras

The buildings at 181-199 Columbus Ave. are also attractive to Aimco because they have a dozen stores that provide an additional source of dependable revenue. If air rights are available, that's another plus for the company.

The other key to the firm's battle plan for New York is that it refuses to participate in competitive bidding for buildings. Ms. Malone only approaches landlords who do not have their properties on the market.

She tells them that her client, a firm with a $3.7 billion market cap, is a dependable deal closer. She also points out that if they want to defer capital-gains taxes, Aimco can pay them with operating partnership units, a currency that only REITs can offer. And whether deals are done with cash or operating partnership units, the sellers also get the benefit of not having to fork over commissions to a sale broker.

Not surprisingly, the sale brokers argue that landlords who play it Aimco's way are short-changing themselves.

"Anyone who sells an income-producing property without using a proper marketing and bidding process is definitely going to lose money," says Robert A. Knakal, chairman of Massey Knakal Realty Services Inc.

Numerous multifamily landlords don't want to bother with bidding, he acknowledges. They think they know what prices their properties can command. They create fertile terrain for Aimco.

"There's opportunity for the savvy buyer to get buildings for less than they are worth," Mr. Knakal says.

Copyright 2003, Crain Communications, Inc