Investors pay top dollar to snap up Tri-City apartments
A buying frenzy hit the Tri-City apartment market in the waning weeks of 2021.
Driven by tax considerations and attracted by the strong economic recovery and low rental vacancy rates, investors closed deals for complexes large and small, new and old.
Investors paid big prices and signaled their confidence that future rent increases will justify their bets on the Mid-Columbia rental market.
Mason Fiascone, an apartment broker with Paragon Group, tracked eight deals representing 608 units and $100 million in December alone. Public and private records confirm that buyers paid premium prices, either to buy new properties or because they see opportunities to renovate older ones and raise rents.
Two seemingly unrelated sales offer a glimpse at the value buyers see in the Tri-Cities.
Badger Mountain Ranch in south Richland and Irving Place Apartments in Kennewick commanded prices that will yield similar returns to their respective buyers.
Fiascone represented Irving Place’s longtime owner, a Bend, Oregon, investment group looking to step away from both Washington and apartments.
The 136-unit property, 100 N. Irving Place, was built in 1979 and sold for $19.4 million on Dec. 11, or $143,000 per unit. The buyer was Irving Place 136 LLC, which is associated with a Bellevue development firm.
Badger Mountain Ranch, 451 Westcliffe Blvd., is a 176-unit complex built in 2013. It sold Dec. 14 for $50.3 million, or $286,000 per unit. The buyer was Badger Mountain ICG LLC, a Seattle-based fund that invests in apartments
The per-unit prices reflect the different ages and the different amenities offered by the two properties. By one key metric, the sales were nearly identical: Cap rates. A cap, or capitalization, rate reflects the return on the investment, based on existing rents, and is akin to the interest paid on a savings account.
The lower the cap rate, the higher the price and the lower the return on the investment.
Irving Place and Badger Mountain Ranch both sold for cap rates of about 3.9%, well below the 5% to 6% level that indicates balance in the transaction.
“Wow is right,” Fiascone said of his deal.
High interest in Tri-Cities
December typically brings a flurry of year-end deals as buyers and sellers close deals before a new tax year starts. Even by that measure, 2021 was startling.
“Interest in the Tri-Cities is at the highest level I have seen in my nearly 30 years of working in that market,” said Tim Ufkes, an apartment broker with Marcus & Millichap in Seattle. Ufkes focuses on the Tri-City market, with a current emphasis on the Broadmoor area of west Pasco.
Several apartment sites at Broadmoor are either under contract or have closed deals with developers. The projects will add 3,500 units to the area.
The market will absorb 1,000 units per year as the Tri-Cities gains big new employers. Jobs were the big news of 2021, with employers such as Darigold Inc., Amazon, Reser’s Fine Foods, Local Bounti and others confirming plans to open new plants here. Costco is expected to add a second store too, at Broadmoor.
The vacancy rate for Tri-City apartments was 1.3% in a fall survey covering more than 11,000 local units by the University of Washington’s Center for Real Estate Research. The average rent for both one- and two-bedroom units was $1,275 per month.
Fiascone tracked 63 apartment sales in Eastern Washington in the second half of 2021, totaling nearly $333 million. Tri-City deals represented $185 million of the total, more than half.
His Irving Place deal is a strong example of what investors see in the Tri-Cities. Fiascone credits the growing economy and the fact that the population is now over 300,000 with putting it on the radar.
“There’s more capital that wants to find a home,” he said.
Irving Place’s former owner was an Oregon investment group looking to leave the Washington market and focus on less challenging investments, such as light industrial real estate. Once the group decided to sell, it wanted the deal wrapped by the end of the year.
Fiascone marketed it to four would-be buyers. All visited. All submitted bids.
He called it a property with plenty of upside – meaning it can be upgraded to command higher rents.
A $1.5 million investment in new paint, cabinets, counters, appliances and putting washers and dryers in individual units could raise the cap rate to a healthier level of 6.5%. The complex commands rents averaging about $900 a month. The current market rate for higher end units could push that to more than $1,300.
“There’s a lot of opportunity for the buying group to make improvements, bring it up to market,” Fiascone said.
Badger Mountain Ranch is one of several newer complexes that traded hands.
Regency Park, 3003 Queensgate Drive in Richland, is a 228-unit complex built in 2012. It sold for $44.5 million in July, or $195,000 a unit. The cap rate was not available, but another newer complex, The Tides at Willow Pointe, commanded a 5.64% cap rate from its recent sale.
The Tides at Willow Pointe, a new 30-unit project at 230 Battelle Blvd. in north Richland, sold for $7.5 million, or $250,000 unit, one of the biggest per-unit deals in the region.
Herron Lake was another example of older properties commanding big prices, although it has an intriguing back story.
The 70-unit complex, 51 N. Edison St., was built in 1977. It sold for $10.5 million, or $150,000 a unit, in December. That buyer, an affiliate of DJS Investments of Newport Beach, California, already owns the neighboring complex, Clearwater Bay Apartments. The deal reunites two complexes that were originally built as one and later separated.
The 3.5% cap rate on the Herron Lake sale indicates it made sense to put them back together.
Fiascone said the unusual number of older properties changing hands is evidence of another aspect of the evolving apartment market: Soaring rents and the challenges of managing modern tenant protection laws, including eviction bans during the pandemic.
“It’s harder to manage (smaller complexes) as a mom and pop without professional management,” he said.