Apartment Sale Reflects Inland Market Recovery

REDLANDS, CA-An investor from Northern California has acquired an 82-unit apartment complex here in a deal that Colliers International EVP Kitty Wallace describes to GlobeSt.com as a sign of strong investor interest that in turn is a sign of the improving conditions in the Inland Empire multifamily market. The property, the Cypress Villas at 301 E. Cypress Ave., sold for $11.625 million in a receivership sale, closing at $625,000 above list price and at a pro forma cap rate of 6.25%. Wallace, who is based in Colliers' West Los Angeles office, represented both buyer Sequoia Equities of Walnut Creek and seller MJW Receivers of Los Angeles.

The property generated 21 offers in eight days, with 19 of the offers above asking price, Wallace notes. The bidders ran the gamut from institutional buyers to private equity groups to high-net-worth individuals.

Wallace points out that, "For a building that size, we had more than average interest from institutional investors." She says that part of the added institutional interest, in addition to the high-quality of the complex, was that "Equity Residential was selling a building in the neighborhood at the same time, so there were a lot of buyers were looking at Redlands."

Wallace says the complex, built in 2004, also attracted strong investor interest because of its location in one of the best areas of the Redlands, just east of Redlands Boulevard, within one mile of the University of Redlands and about three miles from Loma Linda University Heart & Surgical Hospital. Proximity to the hospital helped when previous ownership started a short-term housing program to generate additional income when the Inland Empire rental market became challenging, Wallace points out. She says the owners rented about 20% of the apartments as furnished units on short-term leases at up to $2,600 per monthm often to patients who needed to be near the hospital for long-term treatment or doctors who needed short-term housing.

Although the cap rate would be in the high 6% range counting the extra revenue from the short-term units, Wallace says that most bidders underwrote the property at a cap rate around 6% because most of them were uneasy about continuing the short-term rental program. "If you back out all of the short-term housing, it gives you the cap, because most of the buyers were not going to continue the short-term program," she says.

Cypress Villas, which sits on 4.68 acres, is a gated community featuring units from one to three bedrooms that were 100% occupied at the point of sale. The property also features a large leasing office, community room, fitness center, and a resort style swimming pool and spa.

The in-place rents at the time of close were $1,095 for a one-bedroom, $1,295 for a two-bedroom unit and $1,695 for three bedrooms. Corresponding rents for the short-term program were $1,700, $2,100 and $2,600. Unit sizes are 610, 820 and 1,178 square feet.

Wallace says the Cypress Villas deal is a sign that "The Inland Empire may have found its way out of the recession" in the apartment market. "Rents are stabilizing, and nicer locations with better product, are finally seeing rent increases," she says.

Even in the tertiary markets, buildings are close to 90% occupancy now, and not all markets have to give the concessions they once did, Wallace adds. She cites REIS statistics showing that, in the third quarter of 2010, the Redlands submarket achieved 1% rental growth, compared to the Western US at 0.3% and the nation at 0.5% growth. Occupancy rates for the submarket were also higher, at 94.2%, compared to 93.8% in the Westrn US and 92.9% nationwide.