Mountain View Apartments Sell for Sub-5 Percent Yield

Santa Clara Valley Transportation Authority, Hill International, Silicon Valley, Bay Area

By Jon Peterson

Boston-based fund manager Rockpoint Group has paid not quite $30 million all cash to buy a 127-unit Mountain View apartment complex built in 1969. The Matteson Cos., a San Mateo firm, was the seller. Matteson owned the Highland Gardens Apartments for six years, completing a renovation after the apartments’ purchase.

Rockpoint achieved a going-in capitalization rate of 4.75 percent, said Phil Saglimbeni, vice president of investments for Institutional Property Advisors, a Marcus & Millichap brokerage based in Palo Alto. Saglimbeni represented Matteson.

The apartments are located at 234 Escuela Ave., roughly midway between Mountain View’s rapidly redeveloping downtown near Castro Street and the former San Antonio Shopping Center at West El Camino Real and North San Antonio, which is also being redeveloped and expanded.

The cap rate, or yield, is calculated on the trailing 12 months’ income and is indicative of the Mountain View market overall, Saglimbeni said. The complex was 97 percent occupied at sale.

Rockpoint acquired the complex in conjunction with the 60-unit Sequoia Woods complex, at 222 Escuela Ave. adjacent to Highland Gardens, according to public records from the New Mexico State Investment Council. No financial details were available on the purchase of this property. Rockpoint did not comment for this story.

Since the region’s jobs recovery began in 2010, Bay Area apartments’ operations have led the national multifamily recovery and expansion. At 10.4 percent, San Jose metropolitan area apartment rents have grown faster than those in 41 other U.S. metropolitan areas in the last year with the exception of Boulder, Colo., which matched. Rents in the San Francisco metro area are the third-fastest growing at 9.4 percent year over year, according to RealFacts, an apartment research and data analysis firm. In Mountain View, apartment rents have increased by 12.1 percent over the past two years.

But some cracks are emerging. The volume of new construction in North San Jose is raising eyebrows not only among savvy local operators but also among executives with large real estate investment trusts that do business nationwide.

At 1 percent, the pace of rental growth in the third quarter in the San Jose metro area was slower than in more than a dozen other markets nationwide. Rents grew 2.8 percent in the San Francisco metro area in the third quarter, among the fastest rates in the country and just behind the 2.9 percent growth rate in the Portland, Ore., -Vancouver, Wash., metropolitan area—the fastest in RealFacts’ survey.

But San Jose’s average occupancy also fell 1.5 percent in the third quarter to 96 percent. The metro area was one of only seven of the 41 markets that RealFacts tracks where that happened.

And, both the San Jose and San Francisco markets were among 25 metro areas that saw occupancy declines year over year in the third quarter. Most of the declines including those in San Jose and San Francisco were slight—less than 1 percentage point.

“This isn’t a distress call so much as an observation that rents may have peaked—at least for a while” in San Jose, Sarah Bridge, RealFacts founder, wrote in the company’s quarterly apartment market summary.

At $1,980 a month and $1,858 a month respectively, the Santa Clara-Sunnyvale-San Jose and San Francisco-Oakland-Fremont metropolitan areas already have higher average rents than Los Angeles, San Diego, Miami, Dallas-Fort Worth, Houston and Seattle, according to RealFacts.

“The owners of older properties are now going to be looking at renovating their existing properties for the first time in a while to compete against the new projects that will be coming online in Mountain View in 2013 and 2014,” said Nick Grotjahn, a RealFacts spokesperson. “Over the last four years the property owners didn’t have to worry about this as there has been no new construction over that time frame. That will change come next year.”

The Mountain View complex was part of a four-property apartment portfolio that Matteson acquired in 2006, Saglimbeni said. The other properties are located in Walnut Creek, and he is also marketing them for sale. He would give no further details other than the properties total 358 units.

According to the Matteson Web site, the assets it owns in Walnut Creek are the 152-unit Creekside Glen at 125 Near Court; the 107-unit Carmel House at 1756 Carmel Drive; and the 99-unit Cypress Creek property at 1011 Ygnacio Valley Road.

Rockpoint acquired the Mountain View properties for its new, commingled Rockpoint Real Estate Fund IV, an opportunity fund for which the manager is targeting an equity raise of up to $2.75 billion. One investor with a $44 million commitment is the San Francisco City and County Employees’ Retirement System.

Rockpoint is looking for additional San Francisco Bay Area investments for the fund, including offices, apartments and hotels. The fund manager, which has a regional office at 1 Bush St. in San Francisco, purchased a million square feet of offices and research and development buildings in Sunnyvale, Santa Clara and North San Jose in 2011.

Institutional Property Advisors has closed $850 million in multifamily sales this year nearly entirely in Northern California. (The brokerage sold a $62 million property in Reno, Nev.) The deals have involved 18 properties totaling 3,926 units.

The brokerage expects its total sales volume to reach $1.1 billion by year’s end, which compares to $900 million in deals closed in 2011 and $1.5 billion of apartment sales at the peak in 2007.

“We predict there will be a concerted effort made by sophisticated landlords and property managers throughout the country to push rental rates to their limits in every market for the remainder of 2012,” Bridge said in her quarterly statement. “Owners recognize now is the ideal time to sell assets, and the market appears to be awash in new listings.”

Rental rate growth will further slow next year in San Jose, New York and Washington, D.C., she predicted.

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