Buyer of $48M Complex Bullish on Downtown

Moran further explains that, at the time of the sale, "The buyer recognized that the in-place income was not fully realized due to the recent completion of the lease-up program and the vacant commercial space," at Glo, which includes 8,453 square feet of ground-floor retail space, anchored by a Starbucks coffee shop at the corner of Wilshire Boulevard and Bixel Street in addition to the 201 apartment units. "The buyer's first year numbers represent a more stabilized property," Moran explains.

Berkshire Property acquired Glo from a joint venture of Vancouver, WA-based Holland Partners and other equity participants. Kevin Mignogna, a Berkshire vice president, says that the Boston-based firm was attracted by the opportunity to acquire a core asset with favorable bond financing at a price well below replacement cost.

Glo is financed with low floater tax-exempt bonds and also carries $3.8 million in tax credits. "The bond financing is what really makes this deal because it will allow us to generate higher cash-on-cash returns compared with conventionally financed deals," Mignogna says.

The transaction created a new joint venture structure in which Holland Partners, the developer of the property, remains in the deal with Berkshire as its new partner. Holland will also manage the property.

Clyde Holland, chairman and CEO of Holland Partners, says that although the market has been "a rough ride of late," apartment absorption remains strong, and there is relatively little new supply on the horizon. On top of that, downtown LA has a mixed-use infrastructure "that is just now reaching critical mass," Holland says. "We're very bullish on the long-term prospects for the luxury rental market in downtown LA."

Mignogna cites statistics illustrating the prospects for the rental market: "We look at downtown, and we see a rental market that is still underserved. At 15 to one, the ratio of jobs to residents is extremely high." Rents in new class A apartment buildings downtown are approaching the levels of luxury product on the Westside, he points out.

Moran notes that although new multifamily deliveries surged in Downtown LA in 2008, apartment absorption remains strong. Approximately 4,000 new multifamily units, including apartments and condominiums, were completed last year, which was twice the annual average from 2005 to 2007. But aggregate leasing velocity at a dozen class A apartment communities delivered in the downtown market in 2008 has averaged more than 200 units per month. That pace is more than double downtown LA's historical absorption rate, Moran points out.

At the same time, the development pipeline has been effectively shut off, Moran adds. He says that although condo reversions may keep the rental market competitive over the next 12 to 15 months, "The level of supply in 2009 and 2010 will be well below downtown's proven ability to absorb." Moran is projecting that there will be approximately 1,000 new market-rate units delivered downtown in 2009, and less than 500 delivered in 2010.

The Glo complex was developed by Holland Partners and constructed by White Residential Inc. in 2007. It consists of two five-story buildings at 1050 Wilshire Blvd., connected by a sky bridge. Apartment units are built over two or three levels of concrete garage parking that total 353 spaces.

Apartments at Glo range from studios to three-bedroom units, with an average unit size of 1,010 square feet. Community amenities include two landscaped plazas, a pool area with Jacuzzi and private cabanas, a clubhouse, a two-story fitness center and a sound-proof screening room.