Apartment Investors
Look for Other Plays

Sellers of apartment buildings increasingly are investing the proceeds in other types of property or outside the real-estate market, a trend that may crimp rising prices for apartment properties, a leading investment real-estate broker says.

Marcus & Millichap Real Estate Investment Brokerage Co., an Encino, Calif.-based firm, says that in the 1,384 sales of apartment buildings it was involved in nationwide over the past 12 months, 35% of private sellers bought retail, office or warehouse properties with their proceeds, while 20% didn't buy another property.

To be sure, 45% of investors did buy apartment properties with their proceeds -- despite high vacancy rates and lowered rents overall -- apparently reflecting the widespread belief in the real-estate industry that the apartment sector will rebound earlier than others when the economy recovers. But the high percentage of apartment-building sellers who took their money out of the sector marks a shift in strategies, Marcus & Millichap says. In part, this shift indicates that investors are having a tougher time finding quality apartment properties with high yields at reasonable prices, says Harvey E. Green, Marcus & Millichap's chief executive. Some analysts and investors have said strong demand for apartment properties, encouraged by low borrowing costs, has pushed apartment-building prices through the roof.

With more sellers leaving the market, the rate of price increases is more likely to slow, says Hessam Nadji, managing director of research services at Marcus & Millichap, though low interest rates will continue to support the market.

The most common alternative apartment-building sellers have been looking at, according to Marcus & Millichap's survey of its closings over the past 12 months, is so-called single-tenant net-lease properties, or STNLs. These are buildings leased by one tenant, typically on a long-term basis, who is responsible for expenses including taxes, insurance and maintenance. About 25% of the private sellers of apartment buildings in deals brokered by Marcus & Millichap in the past year have acquired single-tenant properties with the proceeds, the firm says. The retail sector has been the primary target of apartment-building sellers investing in single-tenant net-lease properties, accounting for 85% of the real-estate acquisitions by those taking money out of the apartment sector.

Mr. Green says the appeal of single-tenant net-lease properties lies in the fact that they are less management intensive, since the tenant does virtually everything a landlord would. (In contrast, apartment buildings are among the most management intensive of real-estate sectors.)

Some real-estate brokers say older, longtime apartment investors are more likely to switch to single-tenant net-lease properties. "There are people who say 'I've had my fill of dealing with the day-to-day management, with complaints about rents and leaks,'" says Timour Shafran, managing director at Capin & Associates Inc., a New York-based real-estate brokerage firm.

Another reason some apartment-building sellers are gravitating toward single-tenant net-lease properties is their higher yields. The average yield for single-tenant net-lease properties ranges from 8% to 9%, compared with 6% to 8% for apartment buildings, according to Marcus & Millichap.

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