By Jon Peterson
Kennedy Wilson Inc. has paid $86.5 million to AvalonBay Communities to acquire the 544-unit Waterford apartments at 25800 Industrial Drive in Hayward.
The purchase is a strategic move to capture the anticipated rise in rents as tenants seek less expensive housing alternatives to other Bay Area regions where the recovery is further along and rents are higher, said Kurt Zech, a senior managing director for KW Multifamily Management Group in its San Francisco office. Zech closed the deal for the firm.
“We think that there is going to be some spillover into our property for people who are looking for cheaper housing than is available in San Francisco and Silicon Valley. These renters are looking for lower-cost housing and are willing to accept a longer commute to work,” he said.
Based on existing rents, Kennedy Wilson achieved a 6 percent cap rate on the purchase. The company bought the property in conjunction with an unnamed investment partner. The acquisition was completed with $18.4 million in equity and $68.1 million of new debt provided by Freddie Mac. The loan has a fixed rate of 3.69 percent for the next 10 years. The loan-to-cost was 75 percent.
Kennedy Wilson expects to invest $4 million into the property above the purchase price for renovations including new paint, replacing all the wood in the complex, expanding the fitness center, re-doing the clubhouse and maybe adding a business center.
AvalonBay acquired the 452,000-square-foot property in 1986, a year after it was complete, according to its 2011 annual report. The average unit size is 831 square feet and the average rent per apartment at the end of last year was $1,231, or $1.43 a square foot.
Marcus & Milichap Real Estate Investment Services in a February report predicted that the San Jose apartment market would be the nation’s strongest in 2012 followed by San Francisco. San Jose landlords were expected to raise rents faster than in any other market in the country, with asking rents up 6.1 percent to $1,620 a month and effective rents up 7.4 percent to $1,548 a month. Meanwhile, asking rents in San Francisco were expected to go up by 5.9 percent to $1,998 per month and effective rents by 7.2 percent to $1,947 a month.
The Hayward property is located in the East Bay near the entrance to the San Mateo Bridge, which Zech believes increases its visibility for renters and plants the notion that it is a good alternative for commuters to Silicon Valley and San Francisco.
When Kennedy Wilson bought the property, the complex was 94 percent occupied.
In April, Kennedy Wilson sold San Jose’s 360 Residences for $118 million to Chicago-based Capri Capital Partners LLC. Capri accepted a 4.2 percent capitalization rate, or yield, with the purchase. The 213-unit apartment tower, originally developed as condominiums, had been acquired by Kennedy Wilson in a friendly foreclosure roughly a year before.
Zech said his Beverly Hills-based company continues to believe there is opportunity in the Bay Area multifamily arena. “We are looking for deals in the South and East Bay, San Francisco and Sacramento,” he said.