Lenders' sales of complexes helps stir apartment market

The recent sales of the Waterford Apartments and Waterstone condominiums in Sparks don't necessarily point to a full-fledged return to strong markets for real estate investment, but they do represent a significant stirring in what's been an extremely weak market the past few years.

The older 240-unit Waterford Apartments on Nichols Avenue sold to AJU Waterford LLC for $13 million, and the class-A Waterstone condos at Kiley Parkway sold to Waterstone Village LLC for $22 million. Both properties had been foreclosed upon and were sold by banks.

Prior to those sales, the last significant apartment transaction to occur in northern Nevada was the $56 million sale of the 450-unit Montebello apartments on Summit Ridge in Reno in late 2008.

Ken Blomsterberg, a first vice president of investments with Marcus and Millichap's Roseville, Calif., office who brokers deals in Reno, says well-heeled investors have begun chasing lender-owned properties because they offer a stronger investment potential. The perception, he says, is that banks are more willing than private parties to cut deals to liquidate foreclosed properties from their portfolios.

Blomsterberg represented the buyer in the Waterford transaction. John Pinjuv and Reed Simmons of Grubb & Ellis|NCG represented the seller, LNR Properties.

Blomsterberg says apartment properties that aren't distressed have begun to surface as well. Sellers have refrained from listing big apartments or condo projects for sale because of the negative perception that the property must be distressed, he says, but a crop of recent listings from private parties, such as a large complex in northwest Reno, point to a shift in the market.

"We need more third-party deals to get this thing kick-started started, but we are starting to see more activity, and that is encouraging for Reno," he says. "It has been a soft market."

Len Ramos, first vice president of the multi-housing group with CB Richard Ellis, says the market still is several quarters away from a return to fundamental apartment buys. The fact that both the Waterford and Waterstone sales had multiple bidders is another encouraging sign that those times are on their way, though.

"It is a positive sign that there are people out there that want to buy, no question about it," Ramos says. "The Waterstone was a good price for a Class-A property that was very attractive; you are not going to see a lot of discounting. The Waterford was in a decent location and was a B-minus property, but there still is a demand for that kind of property as proven by fact that it got a number of offers."

More importantly, Ramos notes, is that both sales provide a foundation upon which to assess value of similar-sized properties. Without any significant transactions over the past few years, buyers and sellers have been at loggerheads over selling and purchase prices.

"These transactions provide a base to judge value," Ramos says.

Ramos says investment in the regional apartment market will return when northern Nevada apartment complexes report consecutive quarters of declining vacancy and increasing rents. Vacancy rates for the most part have declined since mid 2009, but that's primarily due to concessions on rent.

Investor demand for apartments has spiked nationally as well as locally due to improved fundamental conditions, says Dewey Struble, a veteran broker and president of Dewey Struble CCIM. Restrictions on financing, though, have not eased much.

Most of the deals getting done still require significant cash outlay from investors, he says, if not all cash. But that may change.

"The difference today versus the end of 2008 is that many lenders could see the market direction getting worse, whereas for the past six to 12 months the fundamentals of apartments in Reno and Sparks have been improving," Struble says. "Anything that is priced reasonably on multi-family in this day and age will go if it is priced according to the market."

Sales may begin to perk up as well, Blomsterberg notes, because investors who formerly focused on primary markets such as Seattle, Los Angeles or San Francisco are taking a much closer look at secondary markets such as the Sacramento region and tertiary markets such as Reno.

"It's not as competitive, and they feel they can make a better buy," Blomsterberg says. "There's just not a lot of product to pick and choose from (in those markets)."

Floyd Rowley, senior vice president of investments with Johnson Group, agrees that Reno might be on more investors' radar screens due to high pricing in coastal markets. However, Rowley notes, the majority of broker price opinions he's done the past few years have been on properties purchased during the peak of the real estate boom, and many of those owners are still licking their wounds.

Most sales that are forthcoming still will be lender-owned properties, Rowley says.

"The traditional owner-sellers are not in the market. It is still the lenders who are compelled or want to sell for some internal reason."