business

In a commercial real estate market that's still downright scary for most types of properties, including office and industrial, there is emerging one clear winner: apartment buildings.

Lots of capital and potential buyers are chasing after the best buildings and pumping up their values, say industry analysts. And while the number of multifamily sales in the mostly homegrown Twin Cities apartment market has always been low -- a fact even more apparent since the recession began two years ago -- the pace has picked up a bit this year, according to recent data.

One big transaction sticks out among a smattering of smaller deals. The Stadium View Apartments (formerly known as District on Delaware and Melrose Student Suites), a 277-unit student housing apartment complex near the University of Minnesota, changed hands in May for $42 million, putting it among the biggest multifamily transactions in the country for the first quarter.

It compares, for instance, to a $48 million deal for the 159-unit Gardens of Wilshire mixed-use apartment complex in Los Angeles, which attracted 30 suitors, according to PricewaterhouseCoopers' first quarter Korpacz Real Estate Investor Survey.

The apartment complex is big -- it has 956 beds arrayed in four nine-story towers -- with amenities such as a 24-hour movie theater and free tanning beds. The buyer was listed as Blue Vista Capital Partners, a Chicago-based boutique investment firm. Blue Vista's managing principal, Robert Byron, didn't return a call for comment.

The seller's address was that of Los Angeles-based real estate firm Lowe Enterprises.

The sale shows that when it comes to stable, niche-market assets like student housing, at least, there are takers out there, said Josh Floring, a senior associate with the Ackerberg Group and an expert in the U of M-area real estate scene.

"This sale indicates that an out-of-town real estate investment group familiar with student housing believes that they can reach their investment goals with this particular acquisition," Floring said. The Stadium View "is perhaps one of the more challenging assets to retain students because of its design, amenities, reputation and size."

The sale at such a premium price is indicative of the investor appetite for multifamily housing now, given the specialized expertise needed to manage a student housing facility well -- skills, Floring said, that are far different from those needed to operate general market apartments.

"There is a saturation point for every type of housing product, and developers still see opportunity in and around the University of Minnesota for different product types," he said. "There remain a number of new projects in the pipeline of different scales and sizes."

The PricewaterhouseCoopers survey found that U.S. sales of apartments in the first quarter of 2010 was $4.3 billion, double that of the year-earlier quarter. Most of the buyers are like Blue Vista -- investors flush with equity rather than less well-capitalized players who must rely on financing.

One factor driving sales, PWC said, is that the chasm between what sellers are asking for and what buyers are willing to pay is finally narrowing.

Meanwhile, the market fundamentals for apartments continue to improve, with supplies exceedingly tight due to the fact that few new multifamily projects have been built in the last few years. Vacancies and asking rents also appear to have stabilized, ending the declines of the last 24 months.

That has bumped up the values of multifamily assets as investors seek shelter from the commercial real estate storms in the sector. Some of that appetite has trickled down to smaller and older properties in the Twin Cities where the deal flow has shown a modest but steady pace so far this year.

Property records indicate that Premier Properties purchased the Alpine Terrace Apartments at 6300 York Av. S. in Edina for $1.7 million; Bloomington-based Country Inn Properties bought the Oxboro Place Apartments at 98th St. and Lyndale Av. S. in Bloomington for $2.6 million; and Hornig Cos. of Minneapolis picked up the Crossroads Apartments on Glenwood Avenue in Golden Valley for $1.6 million.

In its latest research on the apartment market, Marcus & Millichap said lenders are opening up to smaller, local apartment buyers if they have good track records and are staying within their home markets where they have expertise. Agreeing with that assessment is Bob Fransen, president of Bloomington-based Timberland Partners, which owns 31 apartment complexes in six Midwestern states.

Fransen said financing through Fannie Mae and Freddie Mac is available for smaller regional players such as Timberland who can demonstrate they have been successful in the local markets they are operating in.

"We do feel this is a good time to invest in multifamily properties," he said, adding that his firm has been among the crowded field of suitors who have submitted offers for prime properties coming up for sale.

"We had a strong leasing season this spring, and occupancies have increased by a couple of percentage points," Fransen said. "We feel that demand is returning and the fundamentals are in our favor."

Investors, he said, are still "clearly concerned about safety and want higher-quality, well-located assets to invest in."

And, while secondary markets that Timberland specializes in -- places like Rochester, Des Moines, St. Cloud, and Cedar Rapids, Iowa -- aren't going to provide returns as high as properties on Chicago's Michigan Avenue, they are gaining favor because of their safety and reliability, Fransen said.

Don Jacobson is a freelance writer in St. Paul.