For Atlanta-based real estate firm ECI Group, the recent sale of a 30-year-old garden-style apartment property could mark the end of a strategy that began in 2020.
As cap rates on older Southeastern properties continued to shrink in 2020 and into 2021, executives at ECI Group saw an opening. By selling some of the firm’s older properties built 30 and 40 years ago, they could recycle that money into new properties.
“Normally, new [Class] A-quality properties have lower cap rates than older assets,” ECI Chief Acquisitions Officer Scott Levitt told Multifamily Dive. “But there was so much market demand and such ridiculous financing available that all of these value-add buyers just went crazy for the older assets. And so the cap rates sort of flip-flopped where we were selling these older assets at pretty materially lower cap rates than we were buying brand-new, A-quality deals.“
ECI, which has a portfolio of 7,500 units located throughout the Southeast and Texas with minimal partners, began selling its older properties in 2021. In all, it has moved five properties in the Atlanta area that were built in the 1970s, 1980s and 1990s.
“We felt many of these were in declining locations with weak profiles and lots of capital needs,” Levitt said.
It replaced these properties with five new assets (four in Florida and one in Charleston, South Carolina) that were a year or two old and had significantly fewer capital needs. “You have the same cash flow or more from a brand new property in a better location with a better tenant profile and better long-term prospects,” Levitt said.
Sales window closing
As interest rates have made financing new deals more difficult, it's getting harder for ECI to exchange older properties for newer ones at similar cash flows. Last month, ECI sold The Columns at Paxton Lane apartments in Southeast Gwinnett County to Houston-based InterCapital Group for an undisclosed price. ECI developed the 296-unit community in 1996 and has owned and managed the property throughout that time.
Since the property was originally developed, Gwinnett County has added a number of job drivers, including the Piedmont Eastside Medical Center, Sugarloaf Corporate District, Tucker Office Core, a 700,000-square-foot Amazon fulfillment center and major industrial parks in the I-85 and I-285 corridors.
The Columns at Paxton Lane’s amenities include a central mail kiosk, dog park, swimming pool with cabana area, playground and picnic area, lighted tennis courts, detached garages for some units and an internet café. However, ECI hadn’t made major in-unit improvements at the apartment community.
Unlike its past trades, ECI will have to buy at a lower cap rate when it recycles the profits from the Paxton sale into a new deal, according to Levitt. “That’s the first we’ve done that,” he said. “With the rest, we felt like we were either neutral or we were buying at a higher cap. So it's getting harder to execute these.”
With the market shifting, Levitt acknowledges that ECI is probably done exchanging older properties for newer ones, at least for now.
“We have some other older assets that we would potentially be interested in selling in the near to medium term, but I'm not sure that the dynamics are going to exist where those deals are selling at much lower cap rates than brand new assets,” Levitt said.
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