$21M Apartment Sale Indicates Market Direction

In addition to providing what Runkle describes as a bellwether of the market, the sale of the Broadstone Serrano marks the return of Strata Equity to the multifamily market. Alec Schiffer, VP of acquisitions sales for the San Diego-based firm, tells GlobeSt.com that Strata expects to raise equity of $35 million to $40 million for multifamily acquisitions in 2010 after raising $25 million last year and hopes to leverage its equity to buy $100 million to $120 million worth of apartments in California, Nevada and Arizona this year. "We are looking for assets similar to Broadstone, that are stable with good long-term fundamentals," Schiffer says.

Strata acquired the Broadstone from an Allstate Insurance affiliate called Road Bay Investments LLC, which took the property back from its previous owner via a deed in lieu of foreclosure in May of 2009. The complex of 25 two-story buildings on just under 18 acres, which was built in 1987, was extensively renovated in 2007 and 2008 by the former owner.

According to Runkle, the Broadstone deal illustrates how cap rates for apartment buildings have moved down in Southern California since the beginning of 2009, when "some of the first market-rate deals that could get new financing hit the market." He cites the sales in Orange County of some properties by Northwestern Mutual Life that traded at a 7.5% cap rate and others that traded at a sub-7% cap.

"People are a little surprised that, if prime Laguna Niguel apartments sold at below a 7% cap rate in the early part of 2009, when financing was more generous, a property in San Bernardino has sold at a 7% cap rate in December," Runkle says. "I think everyone will agree there should be a difference of more than a quarter of a point in cap rates between San Bernardino and Laguna Niguel." Runkle says that the comparison in cap rates between last year and now in Orange County and the Inland Empire, "shows that as the year has progressed and as economic uncertainty has dissipated, cap rates have moved down."

Runkle points out that the Broadstone Serrano sale is the only deal of its size of A or B quality apartments in the Inland Empire to trade in 2009. "In a normal market we would have 20-plus trades of A or B quality market-rate units of more than 100 units each in the Inland Empire during a year," he says.

Runkle tells GlobeSt.com that the Broadstone Serrano generated 18 offers, more than half of them at cap rates below 8%. "I think scarcity is playing a part in the equation here," he says.

Schiffer tells GlobeSt.com that Strata Equity, a family firm that has operated since the 1970s, is probably less focused on cap rates that some investors. "Although we look at cap rates and any other factor of a deal that any real estate investor would, we really are looking for long-term, stable cash flow," he says.

Schiffer describes Strata as "debt-averse." He says that the company financed the Broadstone Serrano purchase with a 65% Freddie Mac loan, with the first two years interest-only.

Runkle points out that with its two-year interest-only provision, the 5.73% fixed-rate loan that Strata obtained translates to a cash-on-cash return of 9.26% on the Broadstone complex on a stabilized pro-forma basis. He points out that the property sold two years ago for about $143,000 per door, compared with about $84,000 per door for Strata, which is buying at well below replacement cost. He says that when he began marketing the property in September, he felt that―in the absence of comps in the market―"There is one thing that is going to get investment capital off the sidelines, and it is yield."

Strata, which owned between 3,000 and 4,000 apartment units before selling them in the late 1990s, stayed out of the multifamily market until recently because, "We felt the market was too frothy," Schiffer says. The company's portfolio today includes 21 assets, ranging from land and self-storage to multifamily and a few NNN-leased retail investments, but its focus for 2010 will be on multifamily, Schiffer says.