Apartment investment market heats up in Santa Cruz County

Santa Cruz Sentinel

LIVE OAK – Two weeks after the Tropicana Apartments, a 37-unit apartment complex in Live Oak, went on the market in early July for just under $4 million, the broker received 13 written offers and, by the end of the month, the property was in escrow.

“That was a good feeling,” said Andy Kay, an apartment broker at Santa Cruz-based Lifestyles Real Estate, who co-listed the property with Mike Bloch. “We did our marketing.”

The enthusiasm surrounding the sale of the property, however, is more than location and price, however, according to some people who say the rental investment market activity indicates it is the first bright light in an otherwise dismal real estate market.

“I think investors are starting to take a look at the economy and one of the first things that’s going to come back is the apartment business,” Kay said. “People may not buy RVs anymore, but at least they still need a place to live.”

Budd Fletcher, a Capitola-based mortgage broker serving Northern California, agrees.

“It’s the one segment of the real estate market that’s actually doing well,” Fletcher said. “It’s the first segment of the market that’s actually turning the corner and pulling out.” As more people decide to rent rather than buy a home, demand will increase.

“We’re going to see it everywhere,” Fletcher said. “All the numbers are stacking up. Homeownership is not going to be as bold and big and brave as it has been because fewer people will be buying homes. That market is going to stay in the doldrums for some years. Apartments are the next big thing as far as investments.”

In the Silicon Valley, there were no apartment building sales recorded during the first two quarters of 2010, but sales have been reported in the current quarter, according to RealFacts, an apartment data research company. According to RealFacts, there hasn’t been an apartment property sold since 2007. The company, however, doesn’t track data relating to complexes of fewer than 50 units and there are only about a dozen properties in Santa Cruz County with more than 50 units.

In Santa Cruz County, where building is limited, there should be a “swelling of demand for rental properties,” Fletcher said.

The Tropicana property, which houses eight one-bedroom units and 29 two-bedroom units, was 100 percent occupied. Rents ranged from $1,000-$1,195, according to Kay. The Mid-County location near the beach was a definite draw, but, the building, built in 1957, wasn’t exactly a marketing dream. While “the bones of the building” were solid, it needed paint and some updating.

“The truth of matter is that while she (the owner) maintained the basics, it didn’t show that well,” Kay said. “The fact is not only don’t we have a lot of inventory of these types of properties here, but the credit market been really difficult to get a commercial type loan. In the past six to nine months the OPEN sign is back on for deals that make sense.”

Local developer Bill Brooks, however, hasn’t seen much change in the apartment market because rents haven’t dropped significantly. The biggest impact for him has been that the housing market has slowed and several condominium and housing developments have turned into rental units by default.

Westlake Homes, a 21-unit subdivision development near UC Santa Cruz, took nearly two years for the market to absorb, he said. Most of the units at another development, 2030 N. Pacific Ave. in downtown Santa Cruz, have been rented rather than sold, which was the original plan. “That thing has been put in a holding pattern,” Brooks said. “As the market picks up, it will go back to being what it was originally intended to be.”

Another of Brooks’ projects, Branciforte Commons, a 53-unit property on Water Street that is 98 percent occupied, has been listed on the market recently for $7.7 million. Brooks said there has been “a lot of interest in it,” but he doesn’t intend to sell. Rather, he was “testing the valuation of that project” and “looking for an investor,” an effort that he said he is no longer being pursuing.

Often, bankers are asking developers like Brooks to pencil out the project as a rental property as well as a straight sale.

“It’s a safety net in case you get to market, they want to make sure you can service their loan,” Brooks said.

EDITOR’S NOTE: This story has been corrected to reflect that Bill Brooks did not develop the apartments at 2030 N. Pacific Ave.

This article was first published here.


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