KW, Guardian Life Pay $84M for Avalon Asset

SAN JOSE, CA-Kennedy Wilson Multifamily Management and Guardian Life Insurance Company of America (Guardian) have acquired Avalon at Blossom Hill, a 324-unit apartment property. The new partnership paid $84 million for the 13-year-old property and plans to invest an additional $4.5 million upgrading and rebranding the property as Saybrook Pointe.

The seller was the developer, publicly held AvalonBay Communities, which invested a total of $62 million in the property, according to SEC filings. The deal was brokered by Bill Huberty and Sean Deasy with CBRE. Freddie Mac provided the senior debt for the acquisition.

Avalon at Blossom Hill sits on 7.5 acres at 401 Briar Ridge Dr. The development consists of 16 three-story, garden-style buildings plus a single-story fitness center and leasing office. The project contains 90 one bedroom-one bathroom units, 210 two bedroom-two bath units and 24 three bedroom-three bath units ranging in size from 768- to 1,289 sf and averaging 998 sf. The net rentable area is 323,496 sf.

The property’s physical occupancy at the end of 2007 was 97.6% and the economic occupancy was 96.7%, according to SEC filings, and KW Multifamily senior managing director Eddie Ring tells GlobeSt.com that is still the case. The average rent was $1.56 per sf at the end of the year but is now up to $1.74 per sf, Ring says.

In explaining the company’s interest, Ring says there are significant barriers to entry in San Jose that are “severely” constraining the supply of new apartments. Only 749 units are anticipated to come online in the entire San Jose area this year, he said.

“San Jose is a really, really good market,” he adds. “It’s one of the only areas where you can actually see some forecasted job growth thanks to the tech sector, which is doing quite well and outpacing most of the other sectors. Actual rent growth there last year was between 6% and 8%.”

KW Multifamily’s initial capitalization rate is 5.09%, based on the current rent roll. Ring expects that number to grow to 6% once the units are renovated and occupancy is re-stabilized at higher rental rates. The process is expected to take a couple of years. The company’s typical hold is five- to seven years.

KW Multifamily is familiar with the San Jose market. A little over a year ago, the company paid AIG Global Real Estate $45.75 million College Park, a 331-unit rental property near San Jose City College that has been renovated and rebranded as the Grove.

Last month, AvalonBay formed AvalonBay Value Added Fund II LP with $333 million in equity commitments from itself and four institutional investors. Fund II will acquire and operate multifamily apartment communities primarily in the Northeast, Mid-Atlantic, Midwest, and West Coast regions. With 65% leverage, the fund’s investment capacity is $950 million. Its life cycle is 10 years plus two one-year extension options.