Dan Blackwell
The Orange County apartment investment market is transitioning into a neutral market between buyers and sellers. This trend has emerged in 2019 as rent growth has slowed, the Fed has changed positions on interest rates and changing market sentiment about future growth. This transition could mean more opportunities for buyers that have been sitting on the sidelines or for buyers looking for exchange opportunities in Orange County.
“Overall, the market remains strong but showing early signs of transitioning from a sellers' market into more of a neutral market,” Dan Blackwell, SVP at CBRE, tells GlobeSt.com. “Common feedback is that most of the positives are already priced in the assets and there are concerns in the short-term that we could see some pullback. Volatile interest rates, leveling off rental growth and future rent control concerns for California are putting upward pressure on cap rates. In general, there is a widening gap between pricing expectations of buyers and sellers. This will likely cause transaction volume to be less in 2019 than in recent years. Overall, the number of days on the market is trending upward and price reductions are more common to see.”
Blackwell has recently closed seven multifamily transactions in the Orange County market totaling $41.6 million. All of the sales involved 1031 exchanges. Marlon LTD exchanged a 30-unit apartment complex and a four-unit property in Tustin for a 28-unit property and a 12-unit property in Orange from developer RC Hobbs Cos.; a private investor's purchase of Broadway Luxury Apartment Homes, a 25-unit, three-story apartment community in Anaheim as part of a 1031 exchange; and finally, and an unnamed buyer in the purchase of a 19-unit, two-story apartment building.
The first exchange deal attracted strong investor interest because of the size and upside opportunities. “When RC Hobbs Cos. listed the two new-construction senior apartment communities in the city of Orange, we knew this would attract a lot of investor attention,” says Blackwell. “Totaling 40 units, the opportunity created a fantastic 1031 exchange scenario for Marlon LTD, who acquired both senior properties for $15 million. Marlon sold a total of 34 units in Tustin that consisted of older construction—more than 50 years old—which had a fair amount of deferred maintenance with little depreciation left. When we ran the exchange analysis, the numbers quickly made a lot of sense for acquiring both assets as a package.
This is an uncommon opportunity for value-add buyers in what has been a tight market. “It can be very difficult to trade up into more units, improve location and quality of construction while maintaining your cashflow, without adding a fair amount more of equity to the purchase,” adds Blackwell.
In a similar deal, Korkees purchased Marlon's 34 units in Tustin in an exchange deal where the math simply made sense. “The buyer of the 34 units in Tustin, Korkees, is an investor who was contemplating an exchange of his updated nine-unit property located in Fullerton,” says Blackwell. “The investor had a substantial amount of pent-up equity in the Fullerton property. We were able to sell the nine units in Fullerton for $341,000 per unit and exchange Korkees into the 34 units in Tustin at $280,000 per unit. The math on this exchange also made a lot sense as the buyer plans to increase rents to market rate—an increase of approximately 20%—through extensively renovating the property.
These were challenging transactions to secure. “In order for all of this to work, every investor had to do what they said they were going to do and everyone entrusted our team to get the job done,” says Blackwell. “We were in daily communication with lenders, property managers, appraisers, escrow officers to ensure all this came together. We were confident that we had put the right investors together and it was just a matter of executing. It was a team effort.”
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Kelsi Maree Borland
