On Tremainsville Road south of Alexis, there’s a six-building, 72-unit apartment complex that motorists often scoot past without so much as a passing glance.
Hidden Village Square apartments, on Eldora Drive, are aptly named. Set behind trees and a small business, the complex is barely visible from the street.
But It was visible enough last May when word leaked out the 45-year-old complex soon might be available for sale.
A buyer from Ypsilanti, Mich., immediately submitted an offer of $2.2 million, which the owners accepted before Hidden Village could even be listed.
The sale price might seem surprising, given how the complex last sold nine years ago for $1.65 million and had not received much updating.
But such occurrences are common now as demand for properties in Toledo’s apartment market has become red hot. The result has been a sizable amount of complex “flipping,” though not in the traditional sense.
“It’s not like house flipping. That’s not what’s going on. It’s not like someone put some lipstick on a property and flipped it,” said Harlan Reichle, managing partner of the Reichle Klein Group, a Toledo commercial real estate firm.
“These have been trades of stabilized assets. The sellers are parting with their properties to people who think they can manage it better and make a profit. These have been primarily stabilized assets, not fixer-upper stuff,” Mr. Reichle said.
Reichle Klein, which tracks commercial property transactions, noted 38 apartment complexes changed hands in 2017, one of the most active sales years on record.
Nearly 60 percent of the sales were a fee simple transfer — that is, a buyer bought the land and everything on it from the seller in a straight-up transaction. The average price per apartment unit of complexes sold via fee simple was $30,300, or $3,300 per unit higher than the average sale price in 2016.
Mr. Reichle said while office buildings and industrial properties are strong investments, apartment complexes “have been the favored asset class among property types” the last eight to 10 years.
“That’s been the case since the recession and it’s just sustained that lead in terms of the most desirable property type and Toledo’s followed that trend,” he added.
Tony Plath, a Reichle Klein real estate agent who handled the Hidden Valley Square transaction, said Toledo used to be a market that was overlooked but is now attracting buyers from all over the Midwest, the East Coast and the West Coast.
What they like about Toledo apartment properties, Mr. Plath said, is the area’s capitalization rate — the ratio of net operating income (NOI) to an asset’s value.
For example, if a property recently sold for $1 million, and had net operating income (money left after taxes, utilities, etc. are paid) of $100,000, then the cap rate would be $100,000/$1,000,000, or 10 percent.
Other parts of the country are seeing cap rates in the 5 to 6-percent range on the properties they buy, Mr. Plath said. “Here they’ll see it in the 7 or 8 percent range,” he added.
Making the Toledo area’s apartment complexes more valuable is a decreasing vacancy rate.
In 2011, as the area was coming out of the recession, the overall vacancy rate was nearly 8 percent with an estimated 26,600 units in the marketplace. At the end of 2017 it was 5.9 percent with 22,800 units available.
A partial reason for the falling vacancy rate and increasing occupancy of the area’s apartment complexes is the wave of foreclosures that hit the area after the recession.
“People [who] got in trouble with their house, and maybe lost it, they still needed a place to live. While single-family housing was negatively affected by the recession, the multi-family segment improved,” Mr. Plath said.
According to RENTCafe, a nationwide apartment search website, Toledo led 22 other large cities in 2016 as places where the majority of residents rent, rather than own, their residences.
Data taken from the U.S. Census Bureau’s American Community Survey showed that 50.3 percent of Toledo’s population now rents rather than owns. Also, from 2006 to 2016 the renter share grew 31.3 percent in Toledo, which was the highest shift of any city’s population in that period, according to RENTCafe.
Mr. Plath said that makes Toledo’s apartment complexes more attractive to investors.
“I wouldn’t call them flippers, but they are looking for a [Class] C property in a [Class] C+ or B location but with the property a little bit tired or run down,” he said. “They want to come in and buy it … and after improving it, they want to improve its value because they’re looking to put more value in their portfolio.”
After spending a minimum amount to spruce up property, they can bump the rent by $10 or $20, Mr. Plath said.
“What a $10 per unit value will mean to the value of the property is astonishing,” he said.
“A $10 bump in rent on a 100-unit complex is $12,000. What does that mean to the value?” Mr. Plath said. “At an 8 percent cap rate that equates to $150,000 more in value to the property. A $20 bump in rent increases the value by $300,000.”
The quest for Toledo apartment complexes has led to bidding wars on properties, with six to 10 offers arriving for some complexes, Reichle Klein said.
“These owners of properties are ready to move on and they know the market is hot. They’re seeing a price per square foot that they’ve not seen before, so they’re anxious to get out,” Mr. Plath said. “And now there’s a larger pool of buyers. We’ve had people from Mexico, from Canada looking to spend their money here.
“I’ve had more buyers than I can satisfy. What we lack is product,” he added.