San Jose Apartment Sales Picking Up

Avalon Bay's states in its 1997 annual report that its initial investment in the Fountains was approximately $28 million. Its most recent annual report shows its initial cost for the renamed property was $44 million. As of March 2009, Avalon's total cost net of depreciation was approximately $32 million, occupancy was 95.1% and the average rent per square foot was $1.78 per month.

Local industry sources tell GlobeSt.com the pricing likely will be similar to Trellis Square, a 204-unit property on El Camino Real in Sunnyvale of the same vintage that changed hands in April for $38.3 million or $187,500 per unit. Raintree Partners acquired it from an affiliate of Northwestern Mutual using Fannie Mae financing. The property was 95% leased.

John McCulloch and Curtis Gardner of Apartment Realty Advisors has the disposition assignment. McCulloch declined comment on the specifics until the sale is completed, other than to say the buyer would be putting new financing on the property.

Only one other Silicon Valley asset has changed hands since Trellis Square, according to Real Capital Analytics. Earlier this month, Sares Regis Group of Northern California acquired the 231-unit Bella Villagio Apartments in San Jose, completed in 2003, for $41.5 million or $179,654 per unit. The property was 90% occupied. SRGNC senior executive Kenneth Gladstein said the property was acquired at "close to 50% of what it would cost to build today."

Helping to seal the Bella Villagio deal was SRGNC's ability to assume the existing FNMA loan, which provided 85% leverage at below 6% for over seven years and included three years of interest-only payments. . "[It] was clearly accretive to the deal," he said. "[It] helps to provide both attractive cash yields on our equity and a cushion should the economy remain soft longer than we anticipate."

A local industry specialist tells GlobeSt.com that occupancies are in the 93% to 95% range and rents are down, with most properties' renewing their rental contracts for less than the prior contract. That's in part due to concessions, which appear to be burning off, he says, but have ranged from two- to four weeks on a one-year contract over the last couple of months. Rents could fall again if job losses continue to put downward pressure on occupancy, he says.

"The key for owners is tenant retention," he says. "Most owners can renew an existing tenant at a lower rate and it will still be higher than the rent on a complete re-let."

As for the financing market, the source says Fannie and Freddie are providing 10-year acquisition loans for between 70% and 75% leverage with an interest rate in the mid- to high 5% range, though the initial underwriting tends to be in the low 6% range. At the lower LTV the deal could include a couple of years of interest only, he says, which is attractive to owners in the uncertain economic environment.

In some cases old loans are being assumed when it's accretive to the deal or when relatively new financing makes it prohibitive to put on a new loan," he says, "but in most cases it's not enough term to get people excited. Most buyers right now want a minimum of 10 years and Fannie and Freddie are still putting together very competitive loans."