Kennedy Wilson Buys First Oakland Apartments

By Jon Peterson

Beverly Hills-based Kennedy Wilson captured a 5.7 percent going-in yield on its newly acquired Regency Tower Apartments in the Lake Merritt neighborhood of Oakland.

Now the international real estate investment company plans to add value to the 18-story complex—its first-ever apartment purchase in Oakland—by investing additional sums to upgrade the property and by raising rents to market rates.

The seller was Palo Alto’s Essex Property Trust Inc., which is liquidating assets as part of the anticipated wind-down of an investment fund.

“Current rents in the complex are 30 percent below market. There is rent control in Oakland, but when a tenant does leave, the unit can then be rented at a market rate,” said Kurt Zech, senior managing director in the KW Multifamily Management Group in its San Francisco office on California Street.

Kennedy Wilson paid $31 million, or $174,000 a unit, for the apartments at 1130 3rd Ave. The property was 94 percent occupied when the deal was completed.  The apartments were constructed in 1975.

The average rent in the 178-unit complex has risen from $1,401 a month at the end of the third quarter, according to Essex, to $1,470 a month, Zech said.  Average asking rents are now $1,900 a month for empty units.

The property is blocks from the Lake Merritt BART station, which colored Kennedy Wilson’s decision to buy, Zech said. Renters also are a 10-minute to 15-minute walk from the Jack London Square ferry to Francisco. “Around 50 percent of the complex is rented by people who work in the East Bay, from Oakland to Fremont. The rest is occupied by people who commute to San Francisco to work,” Zech said.

The new owner plans to invest $3 million above the purchase price to spruce up the leasing office, add a resident lounge, make improvements to the entrance and signage and to rebrand the complex.

Joel Kelly, a principal with Bay Apartment Advisors in Oakland, said Lake Merritt properties differ in performance based on their location on the lake. “The area near Regency Towers has vacancy of around 5 percent, while on the north side of the lake it’s much tighter with vacancy of 3 percent. The north side has also seen rents for apartments move up 20 percent from the same time last year,” he said. Kelly described the Regency Towers as an A-quality asset.

Housing costs in San Francisco are now about twice or more what they are in Oakland, Kelly and Zech said. Zech estimated it costs $5 a square foot to rent an apartment in San Francisco compared to $2 a foot to $2.50 a foot in Oakland. “A two-bedroom, one-bathroom, 900-square-foot apartment would be rented for $3,500 a month in the Marina district of San Francisco. The same size unit could be rented for $1,750 in Oakland,” Kelly said.

Kennedy Wilson is a major apartment owner in other East Bay cities. It owns 615 units in Alameda, 550 in Hayward and 1,000 in San Pablo, Zech said.

Essex acquired the complex for approximately $21.2 million in March 2005 for its commingled Essex Apartment Value Fund II.

“The main driving force for us selling the property in Oakland is that the commingled fund has a liquidation period that runs until September of 2013. A decision was made earlier this year to put seven properties on the market this year and seven more in 2013. There is a one-year extension option on the liquidation period that would take us to September 2014. There has not been a final decision made on whether or not to exercise the extension option,” said Barb Pak, director of investor relations for Essex.

Prior to putting the first half of the portfolio on the market, the book value of the assets in Value Fund II was $600 million: 14 properties totaling 2,972 units. The first seven properties should all be sold by yearend for gross proceeds of around $413 million.

Five of the properties have already been sold. Regency Tower is the only Bay Area complex. The other assets are located in Corona, Studio City and Chatsworth in Southern California and Seattle. Essex has not disclosed where the other two properties are located that are to be sold before the year is over.

Essex holds a 28.2 percent ownership stake in the assets in the commingled fund.  The limited partners own the balance.

West Coast Commercial Real Estate News