Recent sales trends indicate that the apartment sector in Orange County has picked up where it left off during the peak days of the last real estate boom.
The 10 largest apartment deals reported here last year sold for a combined $878 million, making it the busiest commercial real estate property type based on largest deals.
The office sector, which saw its 10 largest sales total about $840 million, was the second-most active property sector in OC last year.
Industrial and retail followed, each with less than $200 million worth of reported deals here in 2010.
The apartment sector “has been healing faster than the other asset classes,” said Mary Ann King, president of Moran & Co. and the partner in charge of the brokerage’s Irvine office.
Among large investors in particular, “apartments are experiencing a renaissance of favor,” said King, whose office brokered four of the seven largest apartment deals here last year,
Moran & Co. worked on Irvine Company’s buy of the former Archstone Gateway apartment complex in the Platinum Triangle in October, the priciest apartment complex to change hands in 2010. The Irvine Co. deal is reported by CoStar Group Inc. at $241 million, or about $273,000 per apartment.
It was the largest deal of any building type last year as well as the largest individual commercial real estate property to sell in the county in more than three years.
The 884-unit complex is on State College Boulevard alongside the Santa Ana (I-5) Freeway near the city line of Orange and Anaheim. It is Irvine Co.’s first buy in the Platinum Triangle, and has been renamed Gateway.
In another Platinum Triangle deal, Moran & Co. worked on Palo Alto-based Essex Property Trust’s buy of the 250-unit Anavia apartment complex in December. Anavia is reported to have traded hands for about $80 million, or $322,400 per apartment.
Condo Conversions
Anavia, like several apartment complexes on this year’s list of top deals, initially was eyed by its developer as a condominium project before being converted to rental units.
Other big sales of one-time condo projects last year included Highland, Colo.-based UDR Inc.’s $70 million buy of 1818 Platinum Triangle in Anaheim, and Essex Property’s $128 million deal for the Skyline Towers high-rise project in Santa Ana.
Apartment deals gained the limelight after a slow 2009, when the 10 largest sales totaled just $393 million, according to Business Journal data.
The increase in apartment sales from 2009 to 2010 was, by far, the largest jump for any building type seen last year.
Chalk up the sector’s resurgence to a variety of factors, including low interest rates, improving market conditions, and demographic trends that point to a sustained demand for apartments, especially in areas of the state where land is at a premium, said King.
“In 2009, the market really bottomed out, and people started to recognize that we were at the bottom,” according to King. “They said, ‘if I can close a deal now, I’ll look like a hero 12 months from now.’”
Long-term outlooks favor that view.
In the 10 years prior to the recent recession, occupancy rates in larger complexes here tended to run higher than 95% and annual rent increases of 6% were common.
After the recession hit, occupancy rates fell between 91% and 92%.
Many landlords put rent hikes on hold and even offered a few months free rent to entice tenants as the economy muddled along.
Occupancy rates and rents have begun edging up again over the past year. Apartment tenants can expect to see rent increases of 3.7% this year, according to the latest national report from Marcus & Millichap Real Estate Investment Services Inc.
For the market at large, “the stars are aligning” for an apartment boom, according to a report this month from Irvine’s John Burns Real Estate Consulting.
Among other factors, the consultant’s report notes that more than 1.2 million young adults moved back in with their parents from 2005 to 2010, creating a “huge, pent-up demand for rentals.”
The improving economy recently has led “children of the baby boom generation (to) re-enter the housing market,” King said.
Among prospective tenants between the ages of 25 and 35, about 75% are seeking to rent right now, according to King.
“They have the confidence to go out in the market (and rent), but less confidence in buying a home,” she said.
Interest rates of less than 5% helped spur a large number of purchases of big apartment complexes in the latter part of 2010. Rates have since increased, but prices have held up thanks to pension funds, real estate investment trusts and other cash-flush institutional investors that are still shopping for deals, according to King.
Plans on Jamboree
In the Irvine area around John Wayne Airport alone, developers are moving ahead with plans for more than 500 apartments in a trio of complexes off Jamboree Road. The complexes are expected to be the first residential developments to break ground in the largely commercial area known as the Irvine Business Complex in several years.
Arlington, Va.-based AvalonBay Communities Inc. recently got the city’s approval to move ahead on a 179-apartment project at the intersection of Jamboree Road and Richter Avenue, near the Diamond Jamboree shopping center.
The four-story project is located next to the 280-unit Avalon Irvine complex that AvalonBay—which owns about 2,000 apartments in the county—built a few years ago at a cost of about $77 million.
Dallas-based Mill Creek Residential Trust LLC has the approvals for the other two projects: a 156-unit development just off Alton Parkway, also next to the Diamond Jamboree center, and 194 units a few blocks away on Kelvin Avenue.
Among newly built complexes in the area that report occupancy levels, Avalon Bay’s existing complex on Alton Parkway was about 95% full at the end of 2010. Calypso Apartment and Lofts, a 177-unit project on the other side of Jamboree Road owned by a unit of Texas-based Behringer Harvard Holdings LLC was 92% leased.
Some Skepticism
One of the area’s largest apartment investors and developers isn’t sure that pricing’s where it should be, despite the market factors supporting a surge in apartment users.
“I’ve seen transactions (here) that are a little odd,” said Michael Hayde, chief executive of Irvine’s Western National Group, the county’s second-largest owner of apartments behind Newport Beach’s Irvine Co. “People are buying Southern California apartments like they’ll never be built again,” said Hayde, speaking last month at a commercial real estate forum sponsored by the California State University, Ful-lerton, Mihaylo College of Business and Eco-nomics.
Hayde, whose company owns some 10,000 apartments, raised about $250 million sev-eral years ago hoping to buy complexes on the cheap. When the fund was raised, he expected capitalization rates—the expected initial return from rents—to run close to 9%.
Instead, they’re still running at 4% to 5.5% for most deals in the area.
“We’ve hardly spent anything,” Hayde said at last month’s conference.
Western National bought one complex on this year’s list of top deals, the Charter Apartments, a 403-apartment complex in Irvine off Jamboree Road.
CoStar data reports the Irvine complex changing hands at about $85 million, while Hayde told the conference his company paid about $60 million for the property.
