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Apartment Rents Still Hot, Sales Cool

Orange County’s once red-hot market for apartment sales appears to have lost some steam over the past year, and signs are emerging that the rest of the country could soon follow suit.

The 10 largest apartment sales here last year combined to sell for a little less than $370 million, according to data compiled for this week’s Top Real Estate Deals special report (see list, page 40).

That’s a decline of about 60% from a year earlier, when the 10 largest apartment deals in OC traded hands for a combined $878 million.

OC’s decline in apartment sales comes as the general outlook for the rental market continues strong. Apartment lease rates are expected to notch a healthy increase again this year on top of a gain 10% or more in 2011, according to recent market data.

The local trend on sales runs counter to the national trend, as the economic recovery and large numbers of home foreclosures have overlapped to lift apartment prices around the U.S.

There was some $54 billion of apartment sales nationwide in 2011, a 50% increase from the prior year, according to data from New York-based Real Capital Analytics, a commercial property data firm.

Sales of apartments were reported to be running 53% higher than year-ago levels on a national level as recently as January according to Real Capital’s data.

One reason for the slowdown on apartment sales in OC: the market has gotten strong enough to encourage new development. Apartment development is on the upswing here, with thousands of units in the works, particularly in Irvine, where several large projects are under way.

Irvine Company

Newport Beach-based Irvine Company is the most active apartment developer locally, with numerous projects under way on its own land. It recently snapped up land in the Park Place complex in Irvine for another potential development. It’s also said to be looking to build apartments on part of the Tustin Legacy site.

The new developments emphasize the shift from buying to developing: Irvine Co. made the largest apartment purchase of the year in 2010, a reported $241 million buy of the Anaheim Gateway project in the Platinum Triangle. It’s not known to have made any other apartment buys in OC since then.

Some large, national investors also have taken a breather on local apartment purchases, based on a reading of last year’s top deals.

Palo Alto-based Essex Property Trust Inc., Arlington, Va.-based AvalonBay Com-munities Inc. and Denver’s UDR Inc.—three of the largest apartment owners in the country —accounted for four of the top six largest OC apartment deals in 2010, spending a combined $378 million on those buys.

Those companies weren’t involved in any of the top 10 apartment sales in OC last year, nor were any other apartment REITS. A few large investors, including AvalonBay, are instead moving ahead on ground-up developments here.

There are some signs that the rest of the U.S. could soon hit a slowdown on apartment sales that mirrors what OC has seen in the past year—and for the same reason.

Recent Report

A recent report in the Wall Street Journal noted that some real estate investment trusts and other large investors that target apartments are looking to build instead of buy, viewing development as offering better returns.

“There is some worry that a bubble could be forming, fed by low-cost financing and aggressive cash-flow growth assumptions,” pushing many investors to the sidelines, the article noted.

There is a “growing list of potential risks and headwinds that are expected to temper apartment demand in the years ahead,” said Newport Beach’s Green Street Advisors Inc.’s Andrew McCulloch, in a recent market report on the multi-family sector.

“The best growth of this cycle is likely in the rear-view mirror,” McCulloch said.

Irvine-based Western National Group was the biggest buyer in OC last year, with several deals completed before talk of a bubble started.

Western National made two of the largest apartment deal here last year when it bought complexes in San Clemente and Anaheim for a combined $126 million. The $95 million it paid for the 368-unit Seacrest Apartment Homes in San Clemente was more than twice the price of the next-closest deal for any individual complex last year.

How many more large area apartment complexes are put on the trading block this year remains to be seen.

Priciest Sale

The priciest sale seen so far this year was the $55 million sale of the Whispering Winds complex in San Clemente. The 250-unit apartment project changed hands last month for about $220,000 per unit, as part of a larger portfolio sale.

Charleston, S.C.-based Greystar Real Estate Partners LLC bought Whispering Winds and three other Southern California complexes from Blackrock Inc. in New York for a combined $169 million.

Local brokerage data currently shows four apartment complexes on the sales block with asking prices of more than $20 million.

The most expensive complex currently up for sale is Via Verde in Huntington Beach, a 277-unit complex located a few blocks from the Bella Terra shopping center.

The property, which totals about 269,000 square feet, is being listed for sale at $75.5 million, or about $273,000 per apartment, according to CoStar Group Inc. data.

An affiliate of Long Beach-based NNC Apartment Ventures LLC owns and manages the Huntington Beach complex, which previously operated under the Seawind Villages name.

NNC Apartment Ventures also was involved in the $25.5 million sale of Valencia Gardens, a 165-unit apartment complex in Tustin that was reported to have sold last October. It was OC’s 8th-largest apartment sale last year.

An affiliate of NNC Apartment sold the complex to Valencia Gardens Apartments Owner LLC, which has ties to Tarzana-based JB Partners Group Inc., an apartment investor that owns about 50 properties in California.

Tustin Cottages

Also currently on the market is Tustin Cottages, a 93-unit apartment property just off Red Hill Avenue and the Santa Ana (5) Freeway.

The recently built property, which was originally designed as a for-sale project, is expected to fetch about $40 million. Brokers with the Irvine office of Jones Lang LaSalle have the listing for the complex, which was built by a unit of Arcadia-based Nevis Homes.

Tustin Cottages is the first new apartment complex to open in Tustin in almost 15 years.

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Mark Mueller
Mark Mueller
Mark is the Editor-in-Chief of the Orange County Business Journal, one of the premier regional business newspapers in the country. He’s the fifth person to hold the editor’s position in the paper’s long history. He oversees a staff of about 15 people. The OCBJ is considered a must-read for area business executives. The print edition of the paper is the primary source of local news for most of the Business Journal’s subscribers, which includes most of OC’s major corporate and community players. Mark’s been with the paper since 2005, and long served as the real estate reporter for the paper, breaking hundreds of commercial and residential real estate stories. He took on the editor’s position in 2018.
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