America may be the famed land of opportunity, but don't discount Europe just yet. As real estate prices continue to soar in the States, waves of American investors are exploring opportunities in the European real estate market.
"The same way Europeans are buying everything that isn't nailed down in Washington, D.C., Americans are trying to buy everything that isn't nailed down in London, Paris, Rome, Milan, and Madrid," says Steve Blank, senior fellow for finance at the Urban Land Institute, a nonprofit research and education firm. Overall buying activity in Europe is becoming dramatically more competitive, according to "Emerging Trends in Real Estate Europe," a new report from ULI and PricewaterhouseCoopers. Deals that might have attracted two or three bids in the past are now attracting 30, 50, or more, the report says. "There is a huge amount of liquidity, and people are looking for some diversifications as to where to invest," says Blank.
One of the hottest foreign markets: Germany. Following the recent privatization of the country's housing stock, several large equity investors have gobbled up large apartment portfolios and hope to take advantage of growth opportunities in the recovering German market. "The German residential sector has seen a number of huge portfolio acquisitions in the past 18 months made primarily by U.S. private equity investors in highly leveraged deals," says Kate Gimblett, a London-based independent business economist and consultant to the Urban Land Institute. "They intend to exit from these via sales to tenants, sales to other property investors, and flotations on the German stock market."
Now one big U.S. REIT has entered the German housing scene. Late last year, Archstone-Smith acquired an 11-building, 822-unit portfolio concentrated in Mannheim, Germany, for $44.5 million. In a fourth quarter conference call, the company stressed the importance of using the purchase to gain market knowledge. "We have not decided to make a big investment push in Europe, but we will learn a lot more about the market if we operate a few assets than if we are merely on the outside looking in," said R. Scot Sellers, Archstone's chairman and CEO. (The company declined an interview.)
The big question: Will other REITs follow Archstone's lead? "I don't know–it's a very tough question," admits Blank. Wayne Vandenburg, CEO of international real estate firm TVO Realty Partners, suggests that overseas investment might be more suitable for private companies. "It's a better platform for a private company that doesn't have public shareholders to answer to," he says. "But if you are in a position where you can make some long-term bets, then I think it is a good strategy."
In addition to Germany, Scandinavia, Switzerland, and Austria top the list of other European markets ripe for investment, says Vandenburg, whose firm is based in Chicago. But he cautions investors that each market operates extremely differently. "People think that everything done in Europe is the same. It's not," he says. "Talk to someone who knows the markets. And just because somebody speaks English, don't think they understand what you are talking about."
–Rachel Z. Azoff
New Habitat
A homebuilding organization moves into condos.
When Habitat for Humanity makes the news, the accompanying pictures are often the same: a bunch of volunteers–usually college-age–hammering away at 2x4s on the jobsite for a single-family house. "Most of the [Habitat] world does single-family, detached breadbox houses, and in the urban areas, they do townhouses," says Karen K. Cleveland, executive director of Habitat for Humanity of Northern Virginia.
In Washington, D.C., those news reports are about to get a fresh look. That's because Habitat, an Americus, Ga.-based organization dedicated to providing simple, decent, and affordable shelter, is going condo. Although the nonprofit has built condos in Oakland, Calif., and San Francisco, a 12-unit property in Fairfax will be the first in the Washington area. The Northern Virginia chapter is working on zoning for a nine-unit development on a plot of land adjacent to the 12-unit property, and Cleveland says the properties will be affordable to people making between 20 percent and 60 percent of area median income.
Why the sudden switch to multifamily? Land costs have risen so high in some areas that developments must be high-density housing to make them viable. "The opportunity for Habitat to control land that would support stand-alone, single-family homes [in Northern Virginia] is virtually impossible," says Conrad Egan, president and CEO of the National Housing Conference. "They have to go to a denser form of development, and that has been townhouses. Now they're branching out into multifamily structures."
Cleveland acknowledges this reality. "Land is becoming so expensive," she says. "We have no choice."
–Les Shaver
Sell Off?
Even big buyers are selling properties these days. Equity Residential in Chicago recently announced that it is exploring the sale of its Lexford Division. The division has 299 properties (with 27,390 apartment units) in 10 states and a property management business in Columbus, Ohio.
–Les Shaver
Shop 'Til You Drop
Talk about being able to advertise that your new condo property is "close to shopping." General Growth Properties is developing a 215-unit condominium community attached to Natick Mall in Natick, Mass. The new development accents a 550,000-square-foot addition to the mall with Nordstrom and Neiman Marcus department stores. The residential portion is expected to open in time for the 2007 holiday season. Residents are lining up fast, with 250 reservations on file. The perfect move-in gift: a DVD of the '90s comedy "Mall Rats."
–Rachel Z. Azoff
New Opportunities
Many housing authorities have seen their federal funding decline over the last few years–but one decided to do something about it. In an effort to increase revenue and diversify its portfolio, the Lucas Metropolitan Housing Authority in Toledo, Ohio, bought the Westridge Apartments in Sylvania Township, Ohio, according to Lawrence Gaster, the agency's executive director.
–Les Shaver
L.A. Story
Downtown Los Angeles' revitalization efforts have a long way to go, but the city isn't giving up anytime soon. Approximately 9,400 apartments and condos are scheduled for development in 2006 and 2007, with another 10,181 units to be built between 2008 and 2015, according to the Los Angeles Times. The revitalization is expected to cost about $12.2 billion (including both residential and commercial construction).
–Rachel Z. Azoff
Rehab Ahead
After receiving more than 1,800 housing violations, the sprawling Lawndale Restoration and Douglas Lawndale complexes–totaling 104 buildings in Chicago–were in need of a change. After the housing violations, HUD instituted foreclosure proceedings against the former owners of the properties and sold the buildings to the city for $10 each. The city's housing authority then transferred the properties to 23 developers who will redevelop them into more than 1,100 units of affordable housing.
–Les Shaver
Affordable Fix
Brace yourself: The Big Apple just might get more affordable. The city announced a $7.5 billion initiative to build and preserve 165,000 units of affordable housing by 2013. As the largest municipal housing plan in the nation's history, the program will provide homes for 500,000 New Yorkers.
–Rachel Z. Azoff
Hidden Assets
A converted Philadelphia warehouse tackles the problem of urban parking.
When Philadelphia developer Switzenbaum & Associates bought a former munitions depot on the Schuylkill River last April with the intention of transforming it into a luxury condo development called South Bridge, it was going where no other developer had wanted to go.
The 750,000-square-foot building, which was 400 feet long by 275 feet wide, was just too big: Using the interior for living space would make the apartments feel like caves. "Everyone who had looked at the building came up with designs that took out the middle to create a courtyard," recalls company president Sam Switzenbaum.
But such a strategy would have driven up project costs and reduced usable space, and besides, Switzenbaum had a better idea. The World War II-era structure's thick concrete floors were strong enough to support tanks, so why not take advantage of them? Working with architects Venturi Scott Brown and Associates, Switzenbaum hatched an $80 million plan to ring the building's perimeter with apartments, then turn the cavernous interior into a multi-level parking garage.
The building's 225 residential units will include five floors of apartments ranging from 800 to 3,000 square feet. The developer will also build a row of new, rooftop townhouses surrounding a landscaped common area–in effect, a rooftop park on top of the garage. Apartment residents will drive into the building and up a ramp to a parking space on their floor, while the townhouse residents will have first-floor parking spaces and take an express elevator to the roof. David Waxman, executive vice president and partner with Switzenbaum, says there will be about 365 for-sale spaces. At a going rate of $30,000 to $40,000 per parking space in downtown Philadelphia, that's a respectable $14 million or so in revenue.
The building will also include ground-floor retail and office space, as well as common areas for residents that will include a gym with an indoor pool, a business center with a conference room, and a walk-in refrigerator box to receive home grocery deliveries.
According to Waxman, the condo units will be priced from the high $200,000s and will offer what he calls "the most amenities at this price point in Philadelphia," including high-end European cabinets, stonework in kitchens and baths, and teak flooring. Besides the option of parking a few steps from their door, residents will enjoy fiber optic broadband, a den/ media room, and a 100- to 300-square-foot utility room that will provide storage and house each apartment's heating and cooling system.
Those amenities are thanks in part to the bargain the developer got on the purchase: The $12.6 million it paid represented a cost of less than $10 per square foot. A 10-year property tax abatement on conversions passed by the Philadelphia City Council didn't hurt, either. But Switzenbaum also credits thorough planning and management. "There are no allowances in this project," he says. "Everything will be part of the budget."
–Charles Wardell
Executive Feedback
As companies sell their Midwestern holdings, who will own and operate apartments in these cities?
A: "With respect to the AMLI Indianapolis [properties], my guess is that we will get a mix of local guys in the Indy market, some institutional capital with some institutional advisors, along with TIC [tenant-in-common] buyers from around the country looking for more yield than they can get on the coastal, high-price, low-cap-rate markets. I believe that, for the most part, local guys will be managing for the TIC buyers and the institutional buyers." –Gregory T. Mutz, CEO, AMLI Residential
A: "As we sell assets in the Midwest markets, we see most assets being bought by smaller private owners, but some assets are being purchased by condo converters and large institutional owners as well." –Alan George, chief investment officer, Equity Residential
A: "It is true that some REITs are positioning their portfolios to have greater exposure on the coasts than in the center of the country. The migration of equity capital makes sense, because the coastal states have a greater proportion of renters versus owners due to higher housing costs. There are many insurance companies, smaller REITs, private owners, and institutions that remain committed to Mid-western markets." –Jon Segner, president and COO, Dominium Management Services
Project of the Month: Kentucky Courts
Washington, D.C.
It sounds like a near-impossible task: Transform a seedy, ramshackle public housing project into a dynamic, mixed-income redevelopment. But that's exactly what Washington, D.C.-based architecture firm Sorg & Associates did with Kentucky Courts, a rental community on the edge of the Capitol Hill historic district in southeast Washington, D.C.
In its former life, Kentucky Courts was anything but modern and contemporary. The residence slowly drifted into a shadowy, dilapidated mess, as its surrounding neighborhood became synonymous with drug wars and violence. But Sorg & Associates and the D.C. Housing Authority saw the potential to revitalize the site's entire block with a revamped and retooled Kentucky Courts. The strategy: Tear down the old Kentucky Courts building and start from scratch.
The big hurdle to overcome, though, was how to create a new three-story structure that packed a powerful aesthetic punch, while not straying entirely from the rest of the site's environment. The previous building had its backs facing the street–there was no fluidity or openness. For Kentucky Courts' reincarnation, the architecture firm created a series of aligning rowhouses, with each unit directly facing the street to encourage interaction.
Each rowhouse features brick veneer exteriors in various colors and shades, which in turn blends in well with the surrounding neighborhood. Two different styles of turrets–one circular, the other rectilinear–sit atop some of the units.
The $8 million development built by IDS Homes will comprise 18 stacked townhomes, 18 flats, and two three-story townhomes. Twelve of the homes will be leased or rented out to moderate-income residents, and the rest will be sold as condominiums. Each home will offer front and rear entrances and off-street parking. The project opened in 2005 and recently won the 2005 AIA Merit Award for Architectural Excellence.
–Abby Garcia Telleria