Recent trades like that
of Northwestern Mutual
Life Insurance’s three
apartment buildings
in Orange County,
CA may herald the
rejuvenation of the
local sales market.
Aventine at Aliso
Viejo sold to Pacific
Coast Management of
Newport Beach, CA for
$56.25 million.
their cash reserves. “It was a balance sheet play,” he says.
The properties went on the market in early December,
and Leon says the response was extremely positive because of
their location and quality. “We probably conducted 130
tours,” he reports, adding there were prospects from “entirely
across the spectrum,” including high-net-worth individuals,
sponsored equity funds, family trusts, public trusts and pension fund advisors.
But Leon says the seller made a strategic decision not to
pursue institutional investors. “They felt private capital was
not only the most aggressive but also the most likely to
close,” he explains. “There are no investment committees
they have to go through, whereas on the institutional side,
there are quite a few levels of approvals, any one of which
can keep the deal from
going forward.”
A significant factor in
the transactions, Dean
notes, is that today’s low
interest rates make it
possible for the buyers
to enjoy cash flow from
day one. “Underwriting
has changed from a
trailing 12-month look to a trailing 90-day look,” he says.
“Lenders don’t want to wait to see how something performs.”
In Leon’s opinion, the deals should break the investment
impasse that’s kept investors on the sidelines since the beginning of the economic crisis. “Everyone is looking to these
deals to find out where the market is,” he says. “There were
so many folks on the sidelines, but now you have data points
to say there’s where deals are getting done. Now it’s a little
more comfortable, and they can say, ‘Maybe I’ll get back in.’
It will definitely stimulate investment activity.”
According to Dean, there’s a lot of private capital avail-
able, looking for the right moment to jump back into the
market. “A lot of these private groups have been refinancing
and building their war chests over the past few years,” he
says. “They haven’t been active in the market, but now they
have a large cash reserve to be redeployed. The money that
didn’t want to compete with the institutions at 4. 5 to 5 caps
now has the upper hand.”
Moreover, he adds, they’re buying for the long term with
no immediate exit strategy, which is why class A properties in
prime locations are particularly attractive to them. He mentions he and Leon have a similar property in Hollywood in
escrow and expect to close soon. It also attracted a lot of
investor interest.
The two brokers, however, caution not to expect a flood
Brokers expect transactions like these will
help to bring investors back into the game by
defining market levels
of similar transactions in Southern California, primarily
because there aren’t that many to be had. “Orange County
averages one to two class A trades per year,” Leon points out.
“It’s very different from Phoenix and Dallas. Those are more
merchant-builder markets, but there are only an average of
2,300 apartments built per year in Orange County. The Irvine
Co. is responsible for 65% of those, and they never sell. So it’s
rare to find class A product like this. It’s similar in Los Angeles.
In general, Southern California is a barrier-to-entry market to
build and barrier-to-entry market to buy.” ◆
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MAY/JUNE 2009 REAL ESTATE FORUM 19
