Equity begins big sell-off

Investors pay top dollar as thousands of local apartments become available

Triangle apartment demand is up. Rents are at an all-time high. And the growing ranks of renters could push them higher.

Landlords are happy.

Yet Equity Residential, the nation's biggest public real estate investment trust that focuses on apartments, is heading for the exit.

The Chicago company is selling what was among the biggest apartment portfolios in the region: 4,031 units in 15 communities across Durham, Orange and Wake counties.

Equity's departure is a minor blip in its strategy to cash out of smaller markets and reinvest in the nation's biggest cities, where there are fewer opportunities for competitors to build and more growing room for rents.

But it could be a strong signal that once-surging Triangle apartment prices have leveled.

"The market is not getting worse," said Scott Busch, a Sperry Van Ness broker who specializes in Triangle apartments. "But it has stopped getting better."

Investors have spent at least $250 million on Triangle apartments this year -- more than halfway toward the average full-year total in the previous 10 years.

The deals, including two Equity properties in northwest Raleigh, indicate that investors still are willing to pay premiums for Triangle apartments. Carlyle Group of Denver paid Equity $25.5 million for Duraleigh Woods, a 363-unit complex. The price was 22 percent above the recently assessed tax value. Carlyle paid $11.5 million -- 21 percent above assessed value -- for Equity's 192-unit Sailboat Bay complex.

Investors and brokers now will examine how long -- and what price -- Equity will take to sell the remaining Triangle properties. That may offer clues about whether the appetite for Triangle apartments will persist during a credit crunch that is affecting commercial property values.

Equity wants to finish its sell-off -- 30,000 units from Washington state to Maine -- by the fall. But a tightening lending environment is reducing the number of potential buyers. That could make it hard to meet that deadline or get top dollar, even in the Triangle, which has been a magnet for investors seeking safe returns in a growing market.

Investors spent $2.6 billion on Triangle apartments between 2005 and 2007, CB Richard Ellis data show. That's more than the total of all local apartment sales during the previous 10 years.

The increase was fueled by a flood of available capital competing for commercial real estate across the country.

After sky-high property prices sapped rental returns in the nation's biggest cities, investors turned to less-picked-over regions such as the Triangle, where job growth spurred demand, rising rents and healthier returns. Prices in the Triangle eventually climbed to records as more investors entered the market.

But as lenders have tightened up by raising interest rates or requiring borrowers to pay more equity, highly leveraged investors who fueled big price run-ups have fallen out of play. That has cooled prices in the biggest cities, allowing some investors to return.

"It's a seesaw," said David Ravin, president of Crosland, a Charlotte company that builds apartments in the Triangle. "People retrench to the bigger core markets."

Also, he pointed out, the Triangle isn't exactly living up to the promise of robust job growth in the face of economic sluggishness nationally.

Job creation -- a key apartment-investment indicator -- slowed last year in the Triangle to about half the pace of the previous year, N.C. Employment Security Commission data show.

"The Triangle isn't immune," Ravin said.

Equity plans to use the proceeds from the Triangle sales to buy back stock and bolster its portfolio in cities such as New York and Los Angeles.

"They have better long-term growth prospects," said Marty McKenna, an Equity spokesman. "Raleigh's a good market, and it has good ups, but you can be more susceptible to development there."

Equity's Triangle portfolio is 95 percent full, with renters who pay an average of $770 a month. But the market accounts for less than 2 percent of the company's net operating income.

By comparison, Equity's New York portfolio, which commands average rents of $2,612, accounts for 10 percent of its operating income.

Other national investors could follow Equity out of the Triangle. That could create opportunities for investors still bullish on the Triangle. There are plenty of them left, brokers say.

"When they stop looking to buy," Ravin said, "then we've got real problems."