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Friday, Jan 27, 2023

Apartments Purchases Back in Favor With Well-Heeled Investors

The market for apartments is generating more interest from investors, according to area brokers.

As home sales have slowed and prices have dropped, prices for apartments on the market have decreased over the past 18 months to two years, according to Peter Scepanovic, senior vice president with Colliers International’s Carlsbad office.

A recent Collier’s apartment market study found a significant drop in the average sales price per unit to $145,000 in September from $168,000 in March. The county also enjoyed a substantial drop in vacancy rates to 2.5 percent countywide from 4.5 percent six months earlier.

While the first half of 2007 did not see a lot of new money in the multi-family housing market, strong rent growth and low vacancy rates, coupled with a price correction, are luring investors to San Diego this year.

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“Now we are seeing a little more interest. Anecdotal evidence that new buyers coming into the marketplace are specifically looking because prices are more reasonable now and the operating side of the equation is very good,” said Scepanovic.

Darcy Miramontes, a broker with Grubb & Ellis|BRE Commercial in San Diego, forecasts vacancy rates to hover around 4 percent to 5 percent in 2008, with rental rates increasing 3 percent to 5 percent this year.

According to Grubb & Ellis’s multi-housing 2008 forecast, high occupancy and low turnover best describe the local apartment market. The report states that many indicators, such as population growth, job growth and income growth, are projected to be positive this year.

Miramontes, who focuses on apartment sales in Southern California, said the local market is one of the strongest nationwide.

“San Diego is one of the only major markets that has an average occupancy rate over 95 percent,” said Miramontes. She said vacancy rates range from 5 percent to near 20 percent in most other markets.

No Affordable Land

The report released in January said another factor positively influencing property values is the lack of affordable land for new projects. With constraints on supply, competition is limited and will remain limited, causing long-term investors to maintain interest in the region, according to Grubb & Ellis.

The highest volume of investor activity in 2008 will be from the traditional core investors, said Miramontes. She said most highly leveraged buyers and condo converters have left the market due to the credit crunch.

However, there is still a disparity between seller and buyer expectations in terms of pricing, said Miramontes.

“Generally in ’08 it is going to have to be a more creative multi-family housing market, meaning sellers will need to get more creative and maybe bring in an equity partner to save their deal. Lenders will have to be more creative in trying to prevent themselves from owning real estate and buyers will have to get a little more creative in their offers,” she said.

“Investors who have a strong banking relationship and lots of cash on hand are going to be able to find some deals in 2008,” said Miramontes.

One local company is looking for that deal. Carlsbad-based Macbeth Apartment Systems Inc. has teamed up with CT Realty Corp. in Newport Beach to pursue multi-family acquisitions. The joint venture has already looked at acquiring several properties since joining forces last month.

Macbeth said it will handle construction oversight, marketing and day-to-day management operations and CT Realty will provide financing as well as strategic planning.

CT Realty, which previously owned 6,000 apartments that were renovated and sold, has focused on redevelopment of office, industrial and self-storage properties in recent years.

Macbeth currently manages 9,000 apartment units as well as 1,100 units in its own portfolio. The total value of units under management is $1 billion.

Approached by Would-Be Partners

Macbeth has been approached by several would-be partners.

“Most of the traditional sources of debt and equity financing want to reduce their risk by placing their funds with companies that have a hands-on approach with the ability to control costs, which is one of our strengths,” said Charles Macbeth, chief executive officer. “Partnering with CT in a joint venture makes a great deal of sense for us. Not only does CT thoroughly understand the value-added marketplace with its substantial redevelopment and renovation requirements, it has an impressive track record of investments and the capital resources we need.”

CT Realty President Robert M. Campbell said apartments converted to condos that did not sell represent a source of properties for his new venture. Campbell said projects partially sold trigger financial headaches for lenders, homeowners associations and even residents.

“With our new agreement with Macbeth, we will have the capability to act as the ‘white knight’ in such situation because we can finance, restructure, redevelop and manage these properties for the benefit of all,” said Campbell.

Last year, several large apartment transactions took place, including the sale of Marbrisas in Chula Vista for $113.5 million or $227,000 per unit, Terrace Gardens in Escondido for $129 million or $234,119 per unit, and Monarch at Shadow Ridge in Vista for $73.5 million or $234,076 per unit.


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