The third quarter of 2023 wasn’t an ideal time to sell an apartment building. Sales were slow, and values were falling around the country.
“Nobody wants to catch a falling knife,” Otto Ozen, executive vice president of Costa Mesa, California-based brokerage firm The Mogharebi Group, told Multifamily Dive. “As rates are increasing, values are impacted. People want to see some kind of stability.”
But even though the sales market was sluggish, Osso Capital and Graceada Partners decided it was time to take The Edge at Lakewood, a 196-unit property in Modesto, to market and generate capital to chase more properties in 2024.
“There's a lot of deals hitting the market in the first half of this year,” Ozen said. “They anticipated that, and that was why their timing unfolded the way it did.”
It didn’t hurt that Osso Capital, a New York City-based investment management firm, and Graceada Partners, a Modesto-based value-add investor, had already given investors their targeted returns on the property. “There was no distress from the seller's side,” Ozen said. “They had a very good loan.”
Private buyer emerges
There were multiple strong offers for The Edge at Lakewood Apartments, but the sellers ultimately decided to go with an offer from what Ozen described as a private 1031 exchange buyer in Northern California, which paid $42.7 million and assumed the property’s loan in a transaction that closed in December. Those groups have a limited amount of time to reinvest money from real estate sales before they incur tax liabilities, which can motivate them to move quickly.
“When they find a deal that matches the investment criteria for the exchange, they can’t take a chance to wait around for another deal,” Ozen said.
Ozen said the buyer was attracted to a number of things at The Edge at Lakewood, which sits on 7.63 acres of land and comprises one- and two-bedroom units ranging from 598 to 880 square feet. Its amenities include a fitness center, clubhouse, pool and covered parking.
Osso Capital and Graceada Partners renovated roughly half of the units in the property, built in 1985, and the common areas. “The buyer saw what they did and got excited that there was upside,” Ozen said. “The renovations were producing higher yields,”
Location was also a selling point for the property, according to Ozen. Modesto sits within two hours of San Francisco and Sacramento, making it an affordable option for hybrid workers commuting to the office once or twice a week.
“In Los Angeles or San Francisco, people are paying 50% of their incomes on housing, but you go to Modesto and it's about 30%,” Ozen said. “There's more disposable income in Modesto households. So, therefore, occupancies are running very healthy and rent growth has been outpacing the core markets, mainly because people left those big cities to go to secondary markets.”
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