2019’s Biggest Apartment Buyer Expects to Hit the Brakes This Year
Morgan Properties Sees Prices Rise, Opportunities Shrink as It Targets Workforce Housing Outside Major US Cities

By John Doherty
CoStar Group
Published: Jan 31, 2020

Competition is fierce, prices are rising and owners are stingy about putting their apartment buildings up for sale.

Those are among the reasons Morgan Properties, the biggest buyer of U.S. apartments last year according to CoStar data, is looking to slow its pace dramatically. Morgan scooped up $3 billion in apartments in 2019, including the biggest portfolio deal of the year: the $2 billion pickup of 18,000 units at 80 properties in October.

This year though, the King of Prussia, Pennsylvania-based real estate firm expects to spend a “mere” $500 million to $1 billion.

“Each and every year that we continue down the longest [economic] cycle in history, it becomes more and more challenging to find opportunities,” said Jason Morgan, a principal at Morgan Properties. “I don’t see us having as big a year as 2019.”

Morgan has been disciplined in recent years, buying older garden-style properties that are 20 to even 50 years old. The firm wants the properties to be not in downtown centers but in the suburbs, and it’s concentrated on a few key markets: greater Washington, D.C., Philadelphia and New York City, including New Jersey.

Typical improvements include new floors, installing washers and dryers and bringing in better appliances. Rents can then be raised to boost returns.

As big investors turn toward older apartment properties outside U.S. cities, Morgan Properties' Jason Morgan says prices rise and opportunities dry up. (Morgan Properties) But Morgan has been aggressive, getting on the train that favors older housing aimed at renters with the incomes of teachers or police officers as a way to make renovations, raise rents and still offer bargains to people priced out of the new gleaming towers in many city downtowns. Founded in 1985, the company steadily grew for decades before exploding in growth after 2012. It now owns more than 75,000 units and ranks among the top five apartment owners nationwide, according to the National Multifamily Housing Council.

“Since 2012, we’ve done about $7 billion in acquisitions,” said Morgan. “We’re probably one of the top three buyers in the country in that time.”

But in the past few years, as construction of high-end urban apartments has swelled, Morgan’s competitors have caught on to the strategy. Buying in the suburbs and looking for older apartments in need of upgrades is the preferred play. That’s driven up prices and reduced the number of properties for sale.

“It’s becoming more competitive as investor appetite continues to be attracted to workforce housing,” said Morgan. “2019 was a monumental year for us.”

CoStar’s numbers bear that out. Boston, for instance, had a record number of apartment sales in 2019: $4.1 billion, almost twice 2018’s total. But they were driven not by huge sales of steel-and-glass towers downtown, but by big portfolios in the suburbs, such as UDR’s $270 million purchase of the 914-unit Commons at Windsor Gardens in Norwood, Massachusetts.

The Washington area also saw record sales last year of $8.3 billion. But fully half of that was from the Virginia suburbs, where investors are scrambling for fixer-uppers with rent-growth potential.

One of the risks for Morgan is that renters will move up to the swankier downtown units, or buy their own home in some markets. In fact, many investors continue to bypass Morgan’s coveted suburbs and pour money into core areas of big cities.

“We saw heavy investment into New York, Washington, Seattle and the Bay Area in the second quarter — all cities where the risk that renters will leave to buy homes is pretty minimal,” said Michael Cohen, vice president of CoStar Advisory Services, in a recent multifamily report.

Morgan’s secret sauce is scale: the ability to buy large numbers of apartments in a single market and save money on management costs. The firm made forays recently into the market of Nashville, Tennessee, and Jason Morgan has eyes open for opportunities in Austin, Houston and Dallas — again, the suburbs, and older assets. He’s looking for 1,000-unit offerings, minimum — not 200-unit one-offs.

The firm is still hot on Washington’s Class B properties in Virginia and Maryland, and it likes Pennsylvania, but not so much its traditional stomping grounds of New York and New Jersey.

Morgan said he’s not a pessimist about the market despite the length of the multifamily market’s run of good luck. Rentals for blue-collar workers tend to stay strong, he said.

“In the Great Recession, our occupancy at its worst was 92%,” he said. Its net operating income "was flat for just one year.”

Going with Class B workforce housing is less risky, he said. “The class is just more resilient than [the higher-end] renter-by-choice stuff.”

jdoherty@costar.com