A stabilized value add opportunity, the Waters Edge Town Apartments is a 30-unit townhome-style complex in Fayetteville, NC. The 2.84-acre four-building community was built in 1985 and is comprised of all two-bedroom units. Sitting along the Cliffdale Corridor, the property is conveniently located minutes from Fort Bragg, the Skibo Road economic corridor, and the Cape Fear Valley Medical Center.
Purchased by the seller in 2012, the apartments were brought to market as part of a three-property portfolio in April of 2022. The owner wanted to capitalize on market conditions and simultaneously scale back their holdings.
The owner’s property management team managed Waters Edge and kept the property in good physical condition. When the portfolio was brought to market, there were no COVID-19 holdovers, and Waters Edge had average economic occupancy of 90% over the preceding 12 months.
While the buildings were in good working order, little had been done by way of unit upgrades, and rents were well below market value. The property’s parking lot needed resurfacing, and some work on curb appeal was in order. During the transaction, one unit suffered a kitchen fire resulting in extensive smoke and water damage.
Based on historical cap rates, Waters Edge would be expected to trade around a 7% cap rate. Even in an up-trending market, the property might be expected to sell in the low 6% range. Given the unstable market conditions and the property’s net operating income, a cap rate under 6% was more than a long shot. Assuming a 6.3% capitalization rate, Waters Edge would be valued at $2.7M.
The most significant challenge in selling Waters Edge was the shifting market conditions. The portfolio was launched shortly after the Federal Reserve raised the Federal Funds rate by 25 basis points – the first rate increase since December 2018. Over the course of the transaction, the Federal Reserve would raise the rates an additional 275 basis points.
The Sweetwater team identified several issues:
– rents below market rates
– dated units
– pricing expectations
– minimal focus on curb appeal
– fire-damaged unit
– historical market cap rates
– shifting financial market conditions
Obtain the highest and best possible price for the Waters Edge Towns Apartments and secure the buyer favorable debt terms.
The solution required a multifaceted approach. First – an excellent marketing strategy was needed to put Waters Edge in front of buyers that would recognize the opportunity it provided. Second – the Sweetwater Investment Sales team would have to address both the buyer’s and seller’s market expectations to ensure the transaction was a win for both parties. Third – the Sweetwater Mortgage Brokerage team would need to navigate the changing lending landscape to help the buyers secure financing and close the deal.
Before promoting Waters Edge, the Sweetwater marketing team, working with the company’s analysts and investment sales team, developed a complete advertising campaign including traditional photos, 3-d tours, aerial pictures and videos, flyers, a promotional video, a dedicated landing page, and a virtual deal room. As always, the marketing team produced exceptionally high-quality materials highlighting the property’s value proposition.
When the marketing material was in place, the first advertising blast went out to Sweetwater’s internal list of investors. Several thousand potential buyers received direct emails introducing this diverse group to the Waters Edge Town Apartments. In addition to the company’s internal list of investors, the entire portfolio was marketed through Real Capital Markets, Crexi, LoopNet, and CoStar.
With tens of thousands of impressions and thousands of views, there was a veritable flood of leads. The investment sales team followed up on every lead and qualified potential buyers. Within no time, there were multiple letters of intent for the seller to review. The call for offers was announced, and property tours were set.
When the property went under contract in mid-July, the Federal Funds rate was between 1.50% and 1.75% – the highest rate since October 2019. A series of delays resulted in an extended inspection period, and by the time the buyers were able to rate lock, the funds rate was 3.00% to 3.25%, with another 100 basis points anticipated before the end of 2022.
With interest rates on the rise, there was a significant increase in the number of multifamily buyers asking for contract price reductions in Q2 of 2022. By the third quarter, there was a spike in requests for price reductions. Most buyers were asking for a 5% to 10% reduction in price due to the increasing cost of debt.
The only price concession made by the seller was a credit at closing to cover the repairs of the fire-damaged unit. This was primarily due to the Sweetwater Capital Mortgage Brokerage team matching the buyers with an outstanding lender that offered highly competitive rates and superior service.
When the title and insurance work were completed, the property closed for an all-cash price of $3,100,000.
The marketing team and analyst created a fantastic product that the investment sales team could leverage to find the right buyers. The mortgage brokerage team matched the buyers with an excellent lender that offered highly competitive rates and superior service. The entire Sweetwater team helped both the buyer and the seller understand and navigate the dynamically changing market.
The Sweetwater team was able to net the seller an additional $400,000, or 8.7% more than the $2.7M projection. At $3,100,000, the exit capitalization rate for the Waters Edge Town Apartments was 5.9%, and the price per door was $103,333. The buyers were able to secure favorable loan terms in a dynamically shifting market and organically push rents by $300, increasing potential rents by 40% in the first 30 days of ownership.