Real Deals

Real Deals: Small firm skips luxury to stay in hot Triangle apartment market

dbracken@newsobserver.comApril 2, 2014 

One of the challenges for smaller real estate investors in the Triangle has been how to compete with the gusher of institutional investment dollars that have come into the region in recent years.

No segment has received more of that money than the apartment market, where pension funds and other large investors have shown a seemingly insatiable appetite for acquiring and developing new properties.

That has posed challenges for companies such as American Residential Investment Management, a small Raleigh firm that was founded in 2006 by Matt Fritter. But this week, ARIM acquired two Triangle apartment communities that show how Fritter is finding investment opportunities even in a heated market filled with deep-pocketed competitors.

The company paid $4.8 million for the Park Place Apartments, a 100-unit complex in Knightdale, and $2.5 million for the Ridgewood Apartments, a 50-unit complex in Wake Forest. Fritter said that neither community was listed for sale, and their modest size meant they drew little attention from bigger players.

The apartments also target a demographic that ARIM believes is being underserved despite all the new apartment construction occurring in the Triangle.

“They’re newer assets, but they target a more working-class demographic, whereas everything coming out of the ground is Class A, luxury,” Fritter said.

A different structure

ARIM paid about $48,000 a unit for the Knightdale and Wake Forest properties. Although the Wake Forest deal is smaller than the company’s typical deals, it is just down the road from a 112-unit complex that ARIM also owns. The company now owns seven communities and about 900 units, the majority of which are in the Triangle.

Fritter said given the cost of land in the Triangle, it’s impossible for new construction to offer rents as competitive as ARIM is able to offer. He estimates that ARIM’s Triangle properties offer rents that are about half what the new, luxury communities are charging.

“Today, to buy land anywhere in the Triangle and build a garden-style apartment … you would spend a minimum of probably $125,000 a unit,” he said. “That’s the reason that everybody who is building is targeting the Class A, luxury resident profile. Because they have to get those rents to make the numbers work.”

Fritter and his partner, Adam Mills, both grew up in Raleigh. Fritter worked as a broker for several local companies before he began acquiring his own properties about a decade ago. ARIM’s approach is both to acquire properties and flip them in three to four years after making improvements, and to hold some assets longer-term.

The company is structured differently from many of its competitors. It doesn’t manage properties for others, nor does it outsource the management of its apartments. While many apartment investors use a fund model where they raise a large amount of capital to make acquisitions, ARIM raises money one deal at a time.

The problem with the fund model, as Fritter sees it, is that once that money is raised, it must be spent within a certain amount of time.

“You end up basically having a gun to your head to put that money to work,” he said.

Supply problem

Fritter has done 24 deals over the past decade, all of which have been profitable, he said. But in recent years, as prices have risen, ARIM has become more selective.

“In the last four years, I’ve done two deals a year,” Fritter said.

He foresees a significant downturn in the apartment market in 2015 as a wave of new units are completed.

At the end of the first quarter, there were 7,977 apartment units under construction in the Triangle, according to MPF Research, which analyzes apartment data in 100 U.S. metro markets. Once completed, those units would expand the apartment inventory here by 6.1 percent – the third-fastest expansion rate in the country behind only Charlotte and Austin.

Fritter said that unlike some larger markets, where the financial barriers to buying a home are high, the barriers to homeownership are relatively low in the Triangle.

“There’s only so many of these Class A renters, and most of them that decide to stay are destined to homeownership,” he said.

The new supply is already beginning to be felt. The Triangle apartment occupancy rate was 93.9 percent in the first quarter, down a percentage point from the same period a year ago, and the lowest the rate has been since the first quarter of 2011, according to MPF. Rents increased 1.9 percent over that period, but that was slower than the 3.3 percent average reported nationwide.

Fritter predicts that the influx of new supply will ultimately force many new properties to offer discounts and concessions, such as several months of free rent. That will trickle down to the Class B properties, as tenants will use the opportunity to move up to nicer communities.

ARIM is betting that the income levels of its tenants mean they won’t be in a position to make such a jump.

“We like to play in that space where we think there’ll be minimal impact,” Fritter said.

Bracken: 919-829-4548 or dbracken@newsobserver.com; Twitter: @brackendavid

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