Could Rising Interest Rates Spur Value Add’s Comeback?

TEMPLE HILLS, MD-Earlier this month a bona fide value add multifamily apartment building traded – bona fide, because while there have been a number of such core transactions, the value-add category has been relatively slack. Few such opportunities have been coming to market, in short.  That may change, however, as interest rates continue to rise.

Even without the changing rate environment, though, it is clear that slowly this segment of the market has been coming back to life. In December, The Donaldson Group of Rockville, MD and its equity partner, New York-based Angelo, Gordon & Company acquired a 459-unit apartment community here for $38 million in an all-cash transaction. The seller, Tarragon Corporation of New York City, sold the property as part of a reorganization following Chapter 11 bankruptcy last year. Marcus & Millichap’s Stacey Milam and Victor Nolletti represented the seller in the transaction.

The new ownership will embark on a capital improvement program for the property, the Heather Hill Apartment Homes, which is located at 5837 Fisher Road in Prince George’s County. TDG Executive Vice President Carlton Einsel estimates the company will invest an additional $8 million. The apartment building, he tells GlobeSt.com, has been starved for attention and now suffers from above-market vacancy and below-market rental rates.

Now the company is on the prowl for other acquisitions for the first time in years, although it doesn’t have anything in the pipeline – or have an exact figure in mind that it wants to invest. “If the right opportunity becomes available we will buy it.” His criteria are properties that are under capitalized or under managed in which the firm can create value by increasing the income and tightening the expense ratio.

The pickings for such properties have been arguably slim, but there is a window of opportunity opening: namely, for  small multifamily deals whose margins are tight – and whose refinancings have fallen through because of the recent rise in interest rates. Tim Sabet of Potomac, Md-based Ideal Realty Group, tells GlobeSt.com that he has seen several deals in the works fall through because of this. “Spreads are rising, and deals that were on the borderline are not penciling in. We haven’t heard about demands for higher cap rates yet, however.”

Ideal Realty almost lost a deal of its own, he says, but salvaged it by offering more of a discount. “It wasn’t as much as the difference in what the loan would have been but it was enough to save the deal.”