With New York recently pushing through rent reforms that have turned the city’s real estate world on its head, some firms are eagerly touting multifamily investment opportunities in other markets.
CBRE announced last week its hire of Sam Zell. No, not the billionaire real estate investor, but the former vice president at Tel Aviv-based investment firm Buligo Capital Partners. After 12 years of working on the buy side, Zell will now oversee CBRE’s multifamily capital markets team in the Philadelphia area, a market that Zell believes has strong fundamentals.
Philadelphia has seen a significant increase in deliveries over the last five years. A recent market report from Marcus & Millichap found that 10,000 units have been added in Center City and suburban Norristown alone, with an expected 5,900 units still in the pipeline. Overall effective rents have seen a 3 percent year-over-year increase on the heels of 5.2 percent growth in 2018. (CBRE’s Philadelphia team closed $104.4 million in first half transactions.)
Zell, a member of Buligo’s team in the Americas, where he oversaw the acquisition, financing and divestment of roughly $2 billion in commercial and multifamily assets, spoke with The Real Deal this week about his decision to become a broker, his famous name and the potential that the City of Brotherly Love offers to multifamily investors in New York.
TRD: Let’s start with the obvious question — how often do you get confused with the other Sam Zell?
Sam Zell: My entire career. He’s one of the top guys in the business, so that happens all the time for sure. It would be like if I went into tech and my name was Steve Jobs. It’s a conversation starter, [so] I think it’s ultimately a good thing. Hopefully I can be a billionaire like him some day.
TRD: What prompted your decision to leave Buligo for CBRE?
SZ: I was with Beligo for a few years and basically started their U.S. shop. I built a nice multifamily portfolio for them here in the Northeast and Mid-Atlantic. I never thought of becoming a broker — I’ve been on the buy side since the market crashed in 2008. In the brokerage community, you don’t see a lot of people like me, so I thought it would be a good idea to shake things up and work with a team I’ve always respected. When you’re an acquisitions guy, you’re on airplanes all the time and moving around a lot. I love Philadelphia and this move enables me to be with my two young kids and wife.
TRD: What’s the state of Philadelphia’s multifamily market?
SZ: You have stability. You don’t have a lot of new supply and especially in the suburbs there is a lot of control on supply. It’s a very mature market and geographically is not far from New York, Washington, D.C., and areas with very low cap rates. This isn’t anything new, but I think I have seen [cap rates] increase historically. I think [out-of-town investors] are looking for new deals and this area, on a risk-adjusted basis, provides that.
TRD: How does the city compare to other markets?
SZ: D.C. and New York are highly compressed. In Philadelphia, you have a lot of institutional investors, but you also have “mom-and-pop” investors — very wealthy individuals — that hold on to real estate for a long time. But as the market has become more well-known from other gateway cities, like New York, it’s popularity has been growing.
As far as cap rates go, you’re looking at a reasonable rate of return versus your investment. This is a stable market, well-located, and it’s good on the supply side, too. And there are good restrictions on supply. You’re looking at a 4 or 5.5 [cap rate]. Just like everything else, there are riskier projects where you’ll get a 6, but generally it’s within that range. Downtown, obviously you have a lot of young and transient people. The educational institutions provide a good, stable base downtown. But if you’re looking at a nice apartment in the affluent suburb of, say, Montgomery County, risk-adjusted it could be even less risky and offer slightly higher cap rates.
TRD: Have you seen a spike in New York investment interest?
SZ: We’ve always had, historically, a strong amount of institutional interest from New York and D.C. It’s difficult to say the specific reasons for it, but generally, you’re just looking at similar risk and higher [capital expenditure in New York]. I don’t know if the rent control laws are specifically doing that.
TRD: Based on the fundamentals you cited — stability, growing rents and restrictions on construction — do you see Philadelphia becoming a more favorable investment opportunity for New York investors?
SZ: It’s hard to say. That’s like trying to predict what day is going to snow next year. You have a lot of uncertainty in politics and people are still asking how long this bull market will run. [But] in the last 12 to 20 months, [the market] has remained pretty steady. There is nothing weird or terrible about the direction things are going. You have good fundamentals as far as supply and demand. You don’t have a ton of big companies crowding the region, but you don’t have any that are really falling off. With the educational institutions, you have a constant flow [of people into the city].
All interviews are condensed and edited for style and clarity.