Value-Added Rental Buildings Listed Near DC

Two large apartment complexes in suburban Washington have hit the market in what may be a harbinger of value-added listings to come.

Both are Class-B properties with upside potential through renovations ó a type of offering that market players predict will be in big demand this year, as rising prices for high-end properties in core markets make second-tier suburban assets more attractive.

The 1,350-unit Howard Crossing in Ellicott City, Md., will likely attract bids of $200 million, or $148,000/unit. The 982-unit Laurel Square in Laurel, Md., is valued at about $100,000/unit, or $98 million. CBRE has both listings.

Howard Crossing, at 8732 Town & Country Boulevard, was built in phases between 1968 and 1975, and most recently renovated in 2005. Itís close to the intersection of Interstate 70 and U.S. Route 29, roughly 12 miles west of Baltimore and 30 miles northeast of Washington.

Starwood Capital of Greenwich, Conn., teamed up with apartment operator Hirschfield Properties of West Hartford, Conn., to buy the property in 2006 for $164.1 million. It was part of a five-property portfolio the partners acquired from Morgan Stanley.

The garden-style complex is 93% occupied, at rents averaging $1,085. The Starwood team has begun to update cabinets, appliances and lighting as units turn over, allowing it to bump rents to an average of $1,148 on the handful of improved apartments. A buyer could boost rents further by undertaking a major overhaul of units and amenities, which include a pool and a fitness center.

Laurel Square is at 13301 Arden Way, near the Baltimore-Washington Parkway, about 15 miles northeast of Washington and 25 miles southwest of Baltimore. It was developed in 1970 as two garden-style complexes. Bozzuto Group of Greenbelt, Md., paid $86 million for the properties in 2006, and began managing both under the Laurel Square name. The occupancy rate is about 89%, at average rents of $1,175. That translates into $1.19/sf, far below the $1.75/sf that nearby Class-A properties command. A buyer could undertake a major improvement campaign in order to narrow that gap.

Rising occupancy rates and rents for luxury apartments in major markets during the last two years have begun to push up leasing demand for less-expensive rentals and improve their appeal to investors. Brokers and buyers predict Class-B assets and value-added plays will be in great demand this year. That may be especially true for the suburbs of the red-hot Washington market, where capitalization rates on Class-A properties have been pushed down to the mid-4% range. Investors will likely accept initial cap rates in the mid-5% for the two Maryland properties, banking on eventual returns of 7% or higher as they renovate units and raise rents.

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