As the credit market tightens, demand is slowing for multi-property portfolios — the most expensive investment sale category. Of the property packages that do sell, more and more are being split into smaller pieces when they change hands.
Current conditions are breaking the mold for big-bloc sales. David Schechtman, Eastern Consolidated senior director, noted that if one saw a big portfolio being split up in 2006, it was a surprising anomaly. Now the opposite is true: It is rare to see a big portfolio sell in one piece.
Experts that The Real Deal spoke to said the trend is to go small, even if it means selling a whole portfolio piece by piece, with different closings and different banks. In some cases a single buyer will even take a whole portfolio from a seller in pieces, because it is easier to get financing for multiple, smaller deals.
“There’s more certainty of execution with smaller transactions,” said Enoch Lawrence, senior vice president at CB Richard Ellis. “You just have more lenders with the ability to finance them.”
Consider a portfolio of five residential and retail properties in Washington Heights put on the market last month by broker Marcia Yawitz of Eastern Consolidated. They were first put on the market in a 12-building package in October, before the seller decided that the condition of the financing market was not conducive to such a bulk deal.
The seller then reintroduced five of the properties to the market last month, offering the option of trading them as one package, in pairs of assets or individually. The seller asked $48 million for the whole thing, with the following prices for its pieces: $22.5 million for two six-story buildings, with 106 residential units and 220 feet of retail frontage on an avenue; $18.5 million for two six-story buildings, with 76 apartments and 200 feet of retail frontage on the avenue; and $7 million for a 49-unit apartment building on a side street.
Yawitz said that today’s credit environment, which calls for such a breakup in order to move these properties, contrasts greatly with last year, when she sold a 47-building portfolio in a single deal to the British bank Dawnay, Day Group. The company paid $225 million for the East Harlem residential portfolio, which consisted of around 1,100 units in mostly walk-up apartment buildings.
New York experienced a rush of portfolio sales between 2002 and the onset of the credit crunch last summer, according to Marco Lala, managing director and partner at Massey Knakal. But he said the volume of trades peaked at the end of 2005 and beginning of 2006, well before the credit crunch hit.
“[The portfolio market] has become a heck of a lot more acute this year,” Schechtman said. He said that a decrease in that type of sales activity has been noticeable since last fall and worsened notably in March.
He said he noticed building owners with portfolios of as few as three or four buildings were being advised by brokers to sell them separately.
During the height of the market, buyers often paid a premium for taking a portfolio comprised of similar buildings, according to both Schechtman and Lala, as Dawnay, Day Group did for the East Harlem buildings.
This counterintuitive pricing trend resulted from “economies of scale,” Lala said. The operating costs of a portfolio get cheaper on a per-unit basis when there are thousands of units, but only if the assets involved are very similar. That gives a comprehensive package of buildings a higher value than the sum of its parts.
But that’s no longer the case.
“You are now seeing portfolios of up to 50 buildings broken up more logically by geographic area or building class,” said Schechtman. “And I think it’s happening in all price ranges in the five boroughs.”
Large portfolios are often consolidated into strategic properties that require similar maintenance, to simplify operating costs, while the portfolio’s “nonstrategic” assets are sold off first.
“If you are a retail operator that focuses on single stores, and you acquire a big portfolio that includes a few retail centers, you may try to sell them off so as to consolidate your acquisitions to match the profile of your firm,” Lawrence explained.
Over the last several years, publicly traded holding companies have started snapping up portfolios built by so-called “mom and pop” investors, Lala said.
Often, these small, privately held “mom and pop” investors owned groups of apartment buildings with modest cap rates. They were acquired over decades and kept as stable sources of income. Institutional investors that purchase entire portfolios like this will often try to renovate or convert to condos the better pieces of the portfolio, and then begin trying to sell off the underperforming properties that have lower cap rates.
“If you have assets that are not performing up to the standard that you hold for the rest of your portfolio, you want to divest yourself of those assets and keep some cash on hand,” Lawrence said.
Another instance in which portfolios often get chopped up is when an investor is “cherry-picking” for an asset that is part of a larger portfolio, and they are not interested in the other properties, he said.
Lala cited a three-building portfolio in the Bronx that he is marketing that includes a more valuable property — a 137-unit apartment building with 430 feet of frontage and two elevators — along with two smaller apartment buildings.
He said a buyer could be interested in taking the whole portfolio for the one “trophy” piece and hold it for its value as an income producer, while selling off the associated buildings for cash.
“If you’ve been trying to get one $20 million building for a decade or two and it becomes available, you’re going to figure out a way to buy the package and try to sell off its other components,” he said.
Lala said that if a seller can get away with moving the portfolio as a whole, it is often preferable because it saves a lot of paperwork and the “brain damage” that results from number-crunching and worrying over five eight-figure transactions instead of one.
If there are multiple bidders for a portfolio of buildings, Lala said, it is not uncommon to compare a variety of offers including wholesale, subdivisions and individual properties.
“If I get 25 offers and add up the ones for pieces [or individual assets] and the ones for the whole portfolio, I see how much I gain by breaking it up.”
Even then, a direct comparison of value doesn’t make the final decision, he said, because of the risk and hassle that results from splitting a package up. If possible, it’s more comfortable to trade a portfolio all in one shot.
“[If you split it up] you’re working with multiple buyers, with different lenders, varying credit and varying amounts of cash,” Lala said.
A related new occurrence that Schechtman said he’s seeing these days is the selling of an entire portfolio from one seller to one buyer, but as individual properties.
Because it is easier to get financing for the smaller, individual purchase of a building, a buyer may get a different lender to provide capital for each asset in a portfolio. They may end up buying an entire five-building package, for example, but do so with five different banks and five different closings.
“If you buy five small buildings in Harlem, if the first building is primarily retail, you may go to a lender who likes to invest in retail,” Schechtman said. “Then for the asset that’s mostly offices, you find a different lender that targets that property type.”
In these cases, the buildings may have all had independent bidding, but if one potential buyer had the highest bid for all of them, they will often go into talks to buy the whole thing in pieces.
“‘Portfolio’ might sometimes be a misnomer these days,” Schechtman said, in reference to these special cases. “If I buy the Jones family’s assets in multiple related deals, and I didn’t do it in a portfolio transaction, but at the end of the day I have all of their buildings, is it no longer a portfolio deal? I guess that’s kind of semantics.”