Watermarke Properties has paid $36.3 million for a pair of offices in the South Coast Metro area of Santa Ana, in the largest multifamily redevelopment play on the books for the city.
The Corona-based apartment investor acquired 200 and 201 E. Sandpointe Ave., a pair of eight-story offices on 8.3 acres at the 46-acre Hutton Centre mixed-use complex at the corner of MacArthur Boulevard and the Costa Mesa (55) Freeway.
The deal marks a 31% discount to the prior sale of the offices in 2017, when Newport Beach-based Cress Capital paid $52.7 million for the buildings, which run some 317,000 square feet.
Commercial brokerage Newmark represented Cress Capital in the deal.
“The value reduction is a result of the current capital markets and fundamentals,” Newmark’s Paul Jones told the Business Journal, referring to the office market’s struggle to regain momentum in the wake of the pandemic and troubled debt markets.
Doubling Up
It’s the second such deal of late for apartment developer Watermarke, which in April closed on the acquisition of City Centre I, a 150,161-square-foot office building in Orange, with plans to redevelop that 6.8-acre site into apartments.
“Sandpointe is yet another example of re-adaptive use of older office campuses,”
Newmark’s Kevin Shannon said. “The weight of capital for multifamily development in Orange County especially remains strong, which created a competitive process.”
Apartment Demand
Watermarke intends to demolish 200 E. Sandpointe—and potentially 201 E. Sandpointe in the future—and replace the office with housing. No zoning change is required, and the entitlement process is expected to take a little more than a year, according to brokerage officials.
Notable tenants of the property include Partners Capital Group, Universal Electronics and Ducommun Inc. (NYSE: DCO), which has its headquarters at the complex.
The offices were about 51% occupied at the time of sale, according to CoStar Group Inc.
Sandpointe’s positioning in the greater airport area with surrounding multifamily projects makes it a strong location for apartments, according to Jones.
“It’s a very supply constrained market with great freeway access to OC’s primary employment markets,” Newmark’s Chris Benton said. He added, 61% of Santa Ana’s housing units are renter-occupied, and rent growth has averaged 3.5% over the past decade while average household income in a 3-mile radius is $120,000.
“Multifamily is still the best asset class in commercial real estate to own by far,” Benton said. “Home prices are still unattainable at current income levels, which means most of the population will still be renting apartments.”
Santa Ana Gains
That’s especially true in Santa Ana, brokers note.
OC’s third-largest city by population saw the ninth-biggest boost in multifamily housing units of any city in California last year, according to May estimates from the California Department of Finance.
Roughly 4,000 units were delivered across the county as part of large apartment projects since the start of 2022, with Santa Ana receiving nearly 1,900 of those units.
“There’s great multifamily fundamentals in Orange County, and specifically Santa Ana,” Benton said.
In a recently completed multifamily conversion project for Santa Ana, Alliant Strategic last year delivered 888 on Main, a 10-story office building turned workforce housing project with 148 units.
The 114,000-square-foot building is more than 50 years old and was last used as an office for Orange County Social Services, which vacated a few years ago.
Santa Ana-based Caribou Industries kicked off the adaptive reuse project in 2018 and sold the project in 2020 to Alliant Strategic for $54 million.
Hutton Centre Discounts
The deal and planned conversion are a result of the ongoing shift in office market dynamics, as low usage and troubled financing markets prompt landlords to rethink investment strategies, while industrial and apartment players target the underutilized property type as a source for new development opportunities.
Sandpointe is the latest portion of Hutton Centre to trade hands at a discount from its pre-pandemic valuation.
In February, 4 Hutton Centre, a 217,000-square-foot office tower at the complex, sold for $25 million, less than half its last sales price in 2019. Joe Wen, the founder of multinational conglomerate Formosa Ltd. and an OC resident, paid about $115 per square foot for the 10-story office in a value-add play.
Less than two months later, the two-building Griffin Towers complex sold for $82 million, or roughly $141 per square foot, down 57% from its last sale in 2014.
Another tower at the complex—3 Hutton Centre—is also on the market, with Cushman & Wakefield representing the seller, Cypress Office Properties, which paid $50.5 million, or nearly $253 per square foot, for the building in 2016.
The 199,834-square-foot office is seeking a price of $39.9 million, or around $200 per square foot, sources indicate, which would mark a 27% price drop.
Hutton Centre counts two other office projects as well as restaurants, the 349-unit Skyline residential tower complex, OC’s tallest residential buildings, and two hotels.
South OC Play
In South Orange County, a five-building, 223,974-square-foot office hub may pave the way for a future multifamily site pending plans from the property’s new owners.
Last October, Irvine-based commercial investor Kelemen Co. and Las Vegas-based Kingsbarn Realty Capital paid nearly $63.8 million for HERE, a five-building office complex in Laguna Hills.
A proposal for the 16-acre site would be among the largest multifamily projects in the works for the county.
Newmark’s Shannon, Jones, Brunson Howard and Brandon White represented the sellers, Cigna Realty Investors and Cruzan, which paid $46 million for the site in 2015.
Newmark indicates a multifamily redevelopment is likely.
Watermarke in OC
In April, Watermarke paid $22.5 million for City Centre I, a 150,161-square-foot office building on 6.8 acres adjacent to the Garden Grove (22) Freeway and the Outlets at Orange shopping center.
The Newport Beach office of institutional investor TA Realty sold the office at a 32% discount to what it paid for the property in 2018.
Watermarke paid nearly $150 per square foot, or $3.3 million per acre on a land basis, for the site, which is currently zoned to allow for up to 60 units per acre, or about 408 units.
The developer has built rentals in OC before, and developed Adagio on the Green, a $130 million, 256-unit apartment project in Mission Viejo, in 2015 along with San Diego-based multifamily developer Wermers Properties.
Watermarke is headed by President Jeff Troesh. Another family member, his father, Dennis Troesh, made a fortune as the prior owner of Corona-based Robertson’s Ready Mix, one of the largest ready-mix and construction aggregate operations in the western United States.
Mitsubishi Materials Corp. in Japan bought out the construction company in 2013 for a reported $2.2 billion.
The Troesh family also had a large stake in data center operator Switch Inc. at the time of its 2017 IPO, according to reports.
Wermers also partnered with the Troesh family for the Park on First, a 603-unit apartment in Santa Ana that recently opened.
