Attractive Conditions Bring Investors Out in Droves to Snap Up Pair of San Diego M-F Properties

Apartment demand continues to hold strong in metropolitan San Diego, and with the government-controlled mortgage lenders actively doling out multi-family financing and cap rates showing signs of coming down, more than 30 potential buyers recently set their sights on two Oceanside, Calif., apartment complexes being sold by Northwestern Mutual Life Insurance Co. The Prime Group emerged victorious, snapping up the assets, which encompass a total of 658 units, for an aggregate $84 million. Prime acquired the 424-unit The Villages of Monterey and the 234-unit Montecito Village from Northwestern Mutual in two separate transactions. Developed in 1988 at 3901 Mesa Dr., Monterey consists of 28 residential structures, a management office and a clubhouse house spread out on 42 acres. Montecito (pictured), built 20 years ago just a half-mile from Monterey at 4302 Cassanna Way, features 18 buildings on an 11.6-acre parcel. The San Francisco-based private multi-family real estate concern paid $52 million and $32 million, respectively, for the properties and relied on financing from Fannie Mae to make the purchases. “Looking back two years ago, the properties would have been at a much higher price point, but in today’s environment, we consider it a market deal,” Alejandro Lombrozo, a member of real estate services firm Cushman & Wakefield’s capital markets group sales team, told CPN. Cushman & Wakefield marketed the assets and represented both the seller and the buyer in the transactions. “It’s a very good buy for Prime. Northwestern Mutual sold above the 7 cap rate range. It’s the first time an institutional seller has met the market over a 7 cap rate for this type of property–a larger apartment community built in the 1980s–in the last several years.” However, having purchased the properties a decade ago, Northwestern Mutual still turned a profit. The life insurance concern paid nearly $36.3 million for Monterey in 1999 and approximately $19.4 million for Montecito in 1998. The San Diego apartment market remains strong as the national apartment market braces for a decline. “Despite a lot of concerns in other markets around the country, San Diego has been holding up; the occupancy rate is 90 to 95 percent in the San Diego area, and over 95 percent in Oceanside,” Lombrozo noted. Additionally, unlike many other major metropolitan markets, the city’s occupancy levels are not being brought down by competition from other property types. “San Diego hasn’t seen a very significant shadow market because there’s a pretty big discrepancy between the price of renting condos and houses versus renting apartments in most markets.” The appropriate conditions appear to exist for the continued success of the city’s apartment sector. “At the end of the day, San Diego is still a very desirable area and there’s not an endless supply of land for new development, so the market is going to remain very strong compared to other markets.” Given San Diego’s favorable apartment market fundamentals and the ongoing willingness of Fannie Mae and Freddie Mac to make loans available, a notable increase in transaction activity may be on the horizon in the city, especially with the gap between buyer and seller pricing appearing to tighten a bit. “Deals are closing at cap rates higher than in the past, and that is causing a great deal of investor interest in this type of product,” Lombrozo said. But not everyone will be in the buying game. “It’s the private groups that have been making a run at these properties; institutional investors are going to be net sellers this year.”