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Chicago investment firm DRW paid a premium to acquire the St. Charles Row apartments in St. Petersburg two years ago, more than doubling the $11 million the seller had invested just 17 months earlier.
But after injecting millions of dollars in capital improvements into the 84-unit community, DRW has managed a profit on its $22.5 million transaction -- and then some, according to Pinellas County property records.
Last month, a DRW affiliate sold the 1175 Pinellas Point Drive complex to a subsidiary of Goldelm Apartments, of Nevada, for $37.46 million — a 66.5% gain in appreciation in less than two years.
“Investors are coming here seeking yield; that's why we're seeing all kinds of out-of-town buyers coming in, and not so many local players,” says Mike Regan, a senior managing director at commercial real estate brokerage firm Marcus & Millichap who specializes in multifamily transactions.
“But the region also has the job growth and the population growth to justify the numbers,” he adds. “Tampa has been among the Top 10 metro areas in the U.S. for job growth since 2012, and people feel a security in that when investing.”
But job gains and population influx don't totally account for the run-up in apartment prices throughout the Gulf Coast. Nor do annual rent rate gains of roughly 5% or more, which have exceeded both inflation and the yields on many more traditional investments.
In the case of St. Charles Row, DRW spent roughly $10 million to upgrade the complex -- a trait shared by many communities where double-digit appreciation has occurred in the past three or four years.
And while some investors are injecting capital to boost returns, others are betting that macro-economic and sociological trends that have reduced American home ownership and fueled desired mobility will continue to push prices.
Still others contend that the Gulf Coast, and especially the Tampa and St. Petersburg areas, will continue to attract investors because relative to other areas of the country — such as Seattle, Denver, Atlanta and San Francisco -- the Tampa Bay Area is largely undiscovered.
“We looked all over the U.S. for (multifamily) projects to acquire, and Tampa was the only coastal city we found where prices had not already exploded,” says Charles Gower, whose Valhalla Holdings of Boulder, Colo., last month acquired the 310-unit Enclave at Wesley Chapel community.
Like Goldelm, Valhalla paid a significant premium. At $52.5 million, its purchase price was 45% higher than what seller Sherman Properties had paid for the 1933 Stonebriar Drive complex in May 2014.
Gower is fine with that.
“We've been in the multifamily business for more than 30 years, and we see a lot of upside in Florida,” he says. “There's still a lot of room. Looking at it from the outside in, so to speak, it's amazing.”
Gower apparently isn't alone in that belief.
It's now commonplace for the run-up in Gulf Coast apartment prices to be 30%, 40%, 50% or more vs. the prices paid just a few years ago, property records show.
Regan is surprised that the gains have taken place not only in newer, highly-amenitized urban projects but also in older, suburban complexes where investors believe rent rate increases might be justified.
“We've seen a lot of rehabilitations justifying prices,” he says. “But what's interesting is there doesn't seem to be a differentiation among classes or product lines or property age.”
Geography doesn't seem to be a factor, either, at least along the Gulf Coast.
In Collier County, for instance, CF Real Estate Services of Atlanta paid 39% more than the previous owner had for the 176-unit Berkshire Reserve townhomes just 22 months earlier.
In Manatee County, an affiliate of Wisconsin-based Continental Properties earlier this month spent almost 29% more than Inland Real Estate Group paid for the 264-unit Lost Creek at Lakewood Ranch apartments in 2012.
Continental's $50.5 million deal ranks as one of the largest in either Sarasota or Manatee counties thus far in 2017.
In Pinellas County, the Carroll Organization, also of Atlanta, bumped the previous price for the 607-unit Lansbook Village in Palm Harbor up by 39% when it bought out partner Bluerock in late April.
And in Hillsborough County, TLR Property Management Inc. acquired the Park at Aberdeen apartments for 40% more than Montreal-based Rosdev Group and Carolyn Corp. paid for the 320-unit complex in October 2014, records show.
Many of those trades were made based on multimillion upgrades, high occupancy and rental rates and the potential to generate additional income going forward.
Nationwide, apartment occupancy has hovered around 95% — even as rental rates have climbed anywhere between 2% and 5% or more each year for the past three years, according to CoStar Property, Reis and other commercial real estate research firms.
John Selby, a senior vice president at commercial real estate services firm CBRE Group's Capital Markets team, in Tampa, believes low interest rates also have played a major role in investors' appetites for multifamily product along the Gulf Coast.
Like Regan, he also sees owner renovations showing up in the form of higher prices.
“Investors are attracted to the market due to its relatively low entry costs and strong apartment fundamentals with strong potential upsides,” Selby says, adding the he knows buyers who have invested more than $20,000 per unit after buying area complexes.
But Regan and others caution that high apartment prices — grounded in pro formas that count on increased rental rates — could face limits based on what consumers are able to pay.
Although experts say housing should account for roughly one-third of an individual's income, many renters routinely spend half their paychecks for a place to live.
“I think rent hikes and price gains will continue in this region, though maybe not at the same heightened level we've seen in recent years,” Regan says.
“I expect we'll see things level off somewhat over the next year or two, though that won't be so much the case in Tampa, especially if the city keeps having the kind of job and population growth it's had in recent years.”
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