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The Aspen Cos., an affiliate of Treetop Development LLC, paid $24.6 million in July for two rental properties in the Bronx, which had been built using low-income tax credits.
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Peter J. Smith for The Wall Street Journal
By
Keiko Morris
Keiko Morris
The Wall Street Journal
CANCEL
- Biography
- @keikomorris
- Keiko.Morris@wsj.com
Aug. 28, 2016 8:06 p.m. ET
New York’s pricey and competitive rental residential investment market is pushing local investors to get creative.
Reflecting these market pressures, Treetop Development LLC and its affiliate company are expanding its dual investment strategy targeting affordable- and market-rate apartment buildings.
“The market has become so difficult for people like us to transact because of the competition and the increase in pricing over the last three years,” said Adam Mermelstein, a principal at Treetop, a New Jersey-based company that develops, owns and operates residential rental buildings.
“We go just outside of our box and find what people might consider hairy deals or [ones that are] difficult to understand and complicated,” he said.
In July, the Aspen Cos., an affiliate of Treetop Development, paid $24.6 million for two Morris Heights properties that had beenbuilt using a mix of low-income tax credits. The deal came with more paperwork, regulations and scrutiny than the typical market-rate transaction but will extend the firms’ reach into the Bronx and boost cash flow, Mr. Mermelstein said.
Treetop’s strategy is indicative of the broader investment market for New York City rental buildings, where investor money from across the globe has helped push up prices over the past five years, brokers and real-estate executives said.
Rental buildings have come to be viewed as stable investments because of New York City’s low apartment vacancy rate and population growth.
Though the pace of price increases for rental residential buildings has begun to slow in the past year, prices per square foot have risen in most of the boroughs over the past several years. In the Bronx, the average price rose 51% from $106 a square foot in the second quarter of 2013 to $160 a square foot in the same period this year, according to Cushman & Wakefield. In Brooklyn, prices rose 77% from $209 to $369.
“One of the more tangible trends is the shift of folks getting out of their comfort zone as to what they would normally buy, whether it’s buying the same type [of investment property] in a different geographic location or a different product type all together,” said Robert Knakal, chairman of New York investment sales at real estate services firm Cushman & Wakefield.
Within the rental residential market, the city’s affordable-rate residential buildings, which have rental limits based on a tenant’s income, have attracted more types of investors in the past three to five years, said Victor Sozio, executive vice president at real-estate-services firm Ariel Property Advisors.
In some cases, an experienced local operator will join with institutional investors or wealth advisers representing high-net-worth individuals or families to invest in affordable apartment properties, which are built or redeveloped with government subsidies, said Mr. Sozio, whose firm brokered Treetop’s recent deal in the Bronx.
“Local operators are partnering up with different buckets of capital we haven’t seen before,” said Mr. Sozio.
The Morris Heights purchases of 1610-1618 Sedgwick Ave. and 1521-1523 Undercliff Ave. offer a glimpse of how Aspen’s focus on affordable properties can complement Treetop’s core business of renovating or redeveloping market-rate buildings in the New York area, Mr. Mermelstein said.
The New York City buildings Treetop purchases and renovates usually provide very little annual cash flow but offer gains through their appreciation in value, Mr. Mermelstein said. The return on investment comes when the building is refinanced or sold. Aspen’s affordable-rate properties are lower-priced and provide steady earnings.
The Morris Heights additions, which have a total of 128 units, also were attractive because the recently constructed buildings will require less repair work, are located in an area with good subway access to Manhattan and are in a borough where the two firms are looking to increase their holdings.
Earlier this year, Treetop bought two development sites in the Mott Haven section of the Bronx, where it plans to build rental buildings.
“In our minds, we are having our cake and eating it,” said Mr. Mermelstein.
Write to Keiko Morris at Keiko.Morris@wsj.com
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