Gigantic MetLife Apartment Sale — A Market Mover?

How’s this for summer heat: Manhattan’s largest apartment complex has officially hit the market. It could blow earlier deals out of the water, potentially fetching nearly $4 billion, industry sources estimate.

Confronted by seemingly unquenchable investor demand for Manhattan properties, insurer MetLife (NYSE: MET) is marketing two sprawling apartment complexes, Stuyvesant Town and Peter Cooper Village. The twin projects, erected in the post-World War II housing crunch, include 11,200 rental units in 110 buildings scattered between 14th and 23rd street, bordering the East River. Many market watchers expect this bellwether deal to lure a deep field of bidders bent on gobbling up the city’s largest rental property.

"We believe current market conditions are very favorable, and we have decided to test the market to gauge buyer interest in these properties," said Robert Merck, head of real estate investments for MetLife, by written statement.

2006 Manhattan apartment sales (through end of May)
Total volume (closed) $2.11 billion
Properties (#) 87
Average cap rate 3.7%
Source: Real Capital Analytics

"With its premier location and distinct character, these true trophy-quality assets should be well-received by the marketplace. [If] market pricing does not reflect our expectations, we will not sell the properties at this time," he says.

A report issued this morning by Darin Arita, a DeutscheBank analyst that follows MetLife, projects that the after-tax proceeds could be as high as $2.8 billion on this deal. His analysis projects each unit selling for a conservative $350,000, which tallies up to a pre-tax gain of $3.3 billion.

One reason for low-balling the valuation is the rent roll. Only 25% of the units are leased at market rates. The balance is protected by rent stabilization laws that limit any landlord’s ability to boost rents until units turn over. A MetLife spokesman declined to comment on how this large block of rent stabilized apartments might affect a sale.

However, if MetLife could sell that 25% block for roughly $500,000 per unit — an achievable number since Real Capital Analytics reports that the average price per unit of Manhattan apartment properties offered in May was $574,000 — that alone would equal $1.25 billion. It’s unclear if MetLife would attempt to increase its percentage of market-rate units as a sale booster, however.

The Stuyvesant Town/Peter Cooper package is just the latest chunk of MetLife’s portfolio to hit the market. In 2005, for example, the insurer sold its former headquarters tower at One Madison Avenue for $918 million. It also sold 200 Park Avenue, which bestrides Grand Central Terminal, for a record $1.75 billion last year.

MetLife’s timing seems good. With condo conversion taking units off the market, rentals are increasingly hard to come by: Vacancies in Manhattan stood at just 0.5% at the end of June, according to Reis Inc. Manhattan apartment owners have boosted rents by 4.5% during through the first six months of the year, pushing the average monthly rent up to $2,400 according to Manhattan-based apartment brokerage CitiHabitats.

That could make the MetLife properties particularly attractive, despite so many rent-stabilized leases. Still, “nobody has any real sense of the pricing on this deal,” says Dan Fasulo, national director of market analysis at Real Capital Analytics. “It could very well achieve record pricing given its size and location.” To his mind, there are no comparables of any value that might shed light on this deal.

He’s also not convinced that Manhattan condo converters are determined to take down this massive property. It’s not just a Manhattan trend, either, as conversion demand has tanked nationwide in recent months. After spending a record $4.03 billion in September 2005, condo converters accounted for just $334 million in acquisitions during in April.

He does have theories about who might be interested, however. Fasulo believes that institutions, REITs, private and foreign investors will closely examine this deal. Since the ultimate sale price could be stratsopheric, Fasulo also predicts that a joint venture will snag the properties. One likely candidate, he believes, is Sam Zell’s apartment REIT Equity Residential (NYSE: EQR). The REIT is no stranger to large Manhattan apartment acquisitions, and this one is as large as they come.

“MetLife is publicizing their goal of selling this property which likely doesn’t have any bids on it,” says Fasulo. “That suggests to me that they don’t even know what the market is willing pay for it, other than a lot.”

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