Investors Struggle to Find Institutional Apartments

Institutional-grade apartment assets don’t come to market very often in San Diego—but when they do, investors scurry to get in on the rare opportunity. As a result, there can be double-digit offers on institutional-quality apartment assets in the market. Recently, Monarch at Shadowridge, a 314-unit apartment property in Vista, CA, came to market and received 23 offers from a mix of capital sources. The JLL brokerage team that covered the deal wasn’t surprised by the activity because of the dearth of opportunities that come to market.

“There is incredible demand for institutional-grade assets in San Diego on the multifamily side,” Darcy Miramontes, EVP at JLL, tells GlobeSt.com. “We are typically a low-transaction market, and typically when institutional-size assets become available, there are definitely a lot of investors interested, and we expected to have that happen here. We expected to have robust activity on this asset, and we weren’t surprised to get 20-plus offers.” Miramontes represented the seller in the transaction, along with Kip Malo, David Young, Jeff Price and John Cunningham.

The number of deals changes annually, but Miramontes says that there are not more than 10 deals a year. For the last few years, there have only been five or six institutional deals to come to market. “On an annual basis, there are fewer than 10 buildings that are 100-puls units and class-A that come to market,” she says. “Sometimes, you only see a couple come to market, if you average it out over the last couple of years. San Diego County is a low transaction market on deals of this size and quality.”

Despite the demand for institutional product, the owner of Monarch at Shadowridge brought the property to market because its loan had come due, not because of the market conditions. “They had owned the asset since 2011, and we sold it to them directly from the developer,” says Miramontes. “The planned on a seven-year hold. Their loan was coming due this year, and they had to make a decision to either refinance it an undertake a light renovation program or sell it. The decided to sell it. The loan was a significant factor in their decision to sell.”

Investors across capital sources bid on the property, including institutional capital, private capital and syndicators. Pacific Urban Residential won the asset for an undisclosed amount through its CalPERS account. In the end, the winning bid wasn’t necessarily the highest dollar amount. “There was a significant component that had to do with deal terms,” says Miramontes. “That includes non-refundable money and due diligence timeframe, closing timeframe and equity source, as well as financing. Pacific Urban came in all-cash.”

Monarch at Shadowridge was built in 2005, and included a value-add opportunity, which ultimately contributed to the strong demand. “The value-add component here was available, but is wasn’t a deep value-add component where there was a lot of capital expenditure work that needed to be done,” says Miramontes. “There were no large capital items on this project, and that made it extremely appealing to the investment community.”