Western National Betting on Apartment Rebound
By MATHEW PADILLA
Irvine-based Western National Group is betting that apartment rents play catch-up with Orange County’s soaring housing prices.
Western National, an apartment owner, developer and manager, has set an ambitious goal for itself: doubling its investment holdings to 26,000 apartments in five years.
The company hopes to take advantage of a split in the housing market that has seen home prices here rise 20% annually in the past few years while apartment rents remained mostly flat.
The company is one of OC’s largest apartment developers and owners. Privately held, Western has kept a low profile but owns 13,000 apartments and manages another 12,000 for other landlords.
That puts the company among the largest apartment companies based here, behind Newport Beach-based The Irvine Company with about 25,000 units and ahead of Igor Olenicoff’s Newport Beach-based Olen Properties Corp. at 10,500 apartments and George Argyros’ Costa Mesa-based Arnel & Affiliates with about 5,000 units.
Western executives say today’s low interest rates can’t last forever. They say when rates go up, already expensive homes are set to become even less affordable. People will stay in apartments longer, they’re betting.
The company’s big expansion plans are sure to require lots of cash.
To help raise money, Western in February lured Stephen Duffy (photo) away from the Irvine office of Ernst & Young International and made him a partner. Duffy is the company’s chief operating officer.
Western is banking on the list of contacts Duffy racked up as Ernst & Young’s partner in charge of real estate capital markets in the Western U.S. Duffy, 50, is set to raise money from private investors.
“We want to be prudently aggressive and really turn up the tempo of growth,” Duffy said.
Duffy declined to say how much cash Western currently has to fund future expansion.
He said the company is seeking to double its portfolio in the next five to seven years and will target Orange County as well as Los Angeles, San Diego, Ventura, Riverside and San Bernardino counties.
Sources said Ernst & Young is searching for a replacement for Duffy.
Cara Weichman, an apartment broker with CB Richard Ellis Inc., said Duffy is an asset for Western.
“He can help the company meet its aggressive goals,” Weichman said. “I think he’s what they needed.”
Duffy now reports to Michael Hayde, Western’s chief executive. Hayde joined the 40-year-old company in 1981 and is a partner.
Rex DeLong also is a Western partner and serves as president. He heads development and is set to work with Duffy on apartment purchases and land buys.
The developer employs about 1,100 workers. Some 700 people work in Western’s Irvine headquarters at 8 Executive Circle near John Wayne Airport.
Brokers said Western has a reputation for being able to raise money from private investors to fund deals.
Randy Teteak is a senior vice president with Irvine-based O’Donnell/Atkins, which brokers land sales to apartment developers as well as other companies.
Western has a strong track record, Teteak said, and its goal of doubling its portfolio in five years, which amounts to buying or building 2,600 units annually, is achievable.
A big challenge for Western, or any other apartment developer, comes from condominium builders, Teteak said. These days, condo builders are paying top dollar for limited land available here amid the strong housing market, he said.
Still, Western’s strategy isn’t simply to go out and buy land. Chief Executive Hayde said the company also partners with landowners, building apartments on their property and sharing ownership.
That’s exactly what Western has been doing with Anthony Moiso’s Mission Viejo-based Rancho Mission Viejo LLC, developer of Ladera Ranch and the county’s second-largest landowner after the Irvine Co.
Rancho Mission Viejo is known for selling its own land to homebuilders. The Irvine Co. does the same but also develops its own apartments and office buildings to generate income.
Industry sources have credited Irvine Co. Chairman Donald Bren with foresight. He has avoided selling off all his land. Instead, Bren’s been transforming the Irvine Co. into a major real estate investment company.
The owners of Rancho Mission Viejo appear to have taken Bren’s cue. They teamed with Western to develop six projects totaling more than 1,000 apartments in Ladera Ranch. The two developers are set to share ownership.
Three projects are finished and three should be done later this year, sources said.
“Real estate has matured as an asset class over the past four years,” Duffy said. “It’s not just a sector for cowboys and risk takers.”
For now, Duffy said Western is more focused on developing, rather than buying, apartments. That’s partly because low interest rates have led to higher prices of existing apartments, even though rents have stayed flat, he said.
The company owns or controls apartment complexes in Anaheim, Aliso Viejo, Brea, Buena Park, Costa Mesa, Cypress, Fountain Valley, Irvine and Mission Viejo, as well as other cities.
Western typically develops class B and B-plus apartments that are slightly less expensive than several of the luxury apartment projects in Irvine, such as the Irvine Co.’s Villa Siena, and new ones planned for Anaheim and Orange.
CB’s Weichman said more affordable apartments are in high demand. Luxury apartments, with their high rents, are the hardest hit in a strong for-sale market, since those renters can afford to buy, she said.
That’s why Irvine, with its plethora of high-end apartments, has one of the highest apartment vacancy rates in the county, Weichman said.
Western also builds apartments for others under the name Western National Construction. That division does anywhere from $150 million to $200 million a year in projects, according to Western.
Clients include the Irvine Co. and Englewood, Colo.-based Archstone Communities.
Duffy, who lives in Corona del Mar, previously was a consulting practice managing partner with Kenneth Leventhal & Co. in Newport Beach before it was bought by Ernst & Young. While at Ernst & Young, he said he occasionally worked with Western.
The company is prepared for an interest rate shift upward, he said.
“It’s going to leave the marketplace to the pros,” he said.
