Head East, investor! Head East!

Atlanta is shaping up as the doorway to the Southeast for California-based repositioning specialists like the Bascom Group, National Commercial Ventures and RCMG Real Estate Advisors as they move eastward across the Sunbelt in search of better returns.

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Over the past few years,investors from California have ramped up their out-of-state investments, favoring Phoenix, Dallas, Las Vegas, and now Atlanta. “Around 70 percent of the deals we brokered this year were to out-of- state investors, a majority of them from California and Florida,” said Allan Hollander, principal of The Hollander Group of Marcus & Millichap in Atlanta. The reason for their migration to second and tertiary markets is simple economics.

“Managing apartments in Atlanta isn’t much different than managing apartments in California, but Atlanta is a good investment in terms of matching risk with the returns,” said Hollander. There is a huge cap rate difference between the two markets: four percent in coastal California compared to cap rates from the six to mid-7 percent range in Atlanta, according to Marcus & Millichap research. But value-added players have never been too concerned with going-in cap rates, looking instead to the return on investment after repositioning the asset in the market.

Hollander sees the greatest sales velocity in the D, C and C-plus asset classes. He said value-added opportunities that are priced to move today are the under-managed and under-occupied assets, some of which were bought in the 1990s out of foreclosure at bargain basement prices that have allowed the buyers to pay off their loans. Now that they own their property outright and don’t have the mortgage, some have skimped on expenses. Also cashing in today are local apartment owners that held on through the bad times of the technology bust and ensuing recession.

Hollander thinks Atlanta is poised for significant returns due to expected population growth and favorable supply fundamentals. Last Spring, the U.S. Census Bureau projected unprecedented population growth in the South and Southeast over the next 25 years. Developers, who for the past several years have focused on condos, are scheduled to deliver 3,000 apartment units in Atlanta this year, down from 4,600 units in 2006. This 0.9 percent increase in inventory is well below the metro area’s five-year average and is expected to keep some downward pressure on vacancy, which Marcus & Millichap expects will retreat by 50 basis points to 7.3 percent this year, following a 20 basis point decline in 2006. Occupancy gains will be strongest among Class B and C properties, which see less competition from the for- sale housing market. Average asking rents are forecast to increase by 2.8 percent, with the strongest rent gains expected in the northern portions of the metro, where high priced housing drives demand for upscale apartments. Value-added investors most likely will be attracted to properties in established parts of Cobb and North Fulton Counties as an alternative to pricier in-town areas.

First stop: Atlanta
Irvine, Calif.-based Bascom Group closed on its first asset in Atlanta on October 31 and, before 2006 came to an end, closed on another four. Bascom Vice President of Business Development Chad Sanderson said the company wants to grow in the Southeast region, using Atlanta as a hub. “We look to build out from there into North and South Carolina, Florida, Alabama and Tennessee. The roll-out will be gauged on a market-by-market basis, but I expect we’ll be expanding our base beyond Atlanta in 2007,” he said.

Timing is the all-important factor and Bascom likes to move into a market while it’s still below the radar of the competition. The privately held venture management firm founded in 1996 with a Southern California focus moved into the Northwest before establishing a presence in Phoenix, Denver and finally Dallas, where the company acquired 17 distressed assets since opening an office there in September 2005. With its latest acquisitions in Atlanta, Bascom owns a portfolio of around 31,000 units, a number of which are undergoing repositioning.

Sanderson has been watching the Atlanta market, where fundamentals declined considerably between 2001 and mid-2005, when the market finally saw some improvement. “We see opportunities in the market that fit our business,” he said. “There are a number of apartment communities that haven’t had a lot of capital put into them and therefore have a challenging tenant base. They need a buyer who can bring capital to the asset and reposition from a physical standpoint. What we’re seeing in terms of increased job growth, continued population growth and a definite slowdown in multifamily construction really creates a good time for us to be there.”

In late December, Bascom closed on the 312-unit Shadow Pines in Sandy Springs along the Georgia Highway 400 corridor — dubbed the Country Club Corridor because of the area’s proliferation of golf club and swim communities. Bascom paid Sentinel Real Estate Corp. $18.7 million, or $59,936/unit, for the property that consists of 144 ones, 140 twos and 28 threes that average 878 square feet and currently rent for $660 to $1,060. Built 26 years ago, Shadow Pines is the youngest of the company’s newly purchased Atlanta assets. The others were built in the early 1970s.

Two assets — the 218-unit Highland South in Jonesboro and the 207- unit Autumn Chase in Marietta — were bought out of foreclosure. Bascom paid $7.5 million, or $34,404/unit, for the 34-year-old Highland South, where units averaging 1,269 square feet rent from $669 to $879. The property is located within 25 miles of Buckhead, Midtown and Downtown Atlanta.

Bascom purchased Autumn Chase for $11.4 million, or $55,072/unit, from Manulife Financial, which was represented in the transaction by Steve Griffin of Cushman & Wakefield. The 33-year-old community sits on a little more than 17 acres in Marietta and consists of two- and three-bedroom units that range from 1,200 to 2,000 square feet. Rents range from $765 to $985. The property is close to three major transportation arteries with access to employment centers in Midtown and Downtown Atlanta.

Bascom paid $21,400, or $32,722/unit, to TVO North America for the 645-unit Windy Hill in Marietta, not far from Autumn Chase. Built in the early 1970s on 41.5 acres, the property consists of ones and twos that average 849 square feet, with rents ranging from $599 to $805.

In October, Bascom picked up the 320-unit Copper Mill in Norcross for $11.15 million, or $34,843/unit. The seller was a local partnership that owns a handful of assets in the market. The 32-year-old, Class C community is close to I-85, just southeast of the intersection of Jimmy Carter Blvd., a stretch of road along which are over a dozen shopping centers with more than one million square feet of retail. During escrow, a fire destroyed 10 of Copper Mill’s units and, at closing, the asset was 65 percent occupied. Rents across the community’s ones, twos and threes range from $635 to $930. Bo Brown and Judy McManus of Brown Realty Advisors handled the transaction for the seller. Bascom will steer its Southeast campaign from California and utilize the third-party management services of RAM Partners in Atlanta.

Concession burn-off, market plays
Value-added players may be betting on Atlanta’s future prospects, but most agree the market is a concessions play right now, while giveaways remain high. “We’re looking at concessions burn-off in Atlanta for the first couple of years and plan to push rents around five percent after the second year,” said Adam Norvell, an acquisitions executive with Los Angeles-based National Commercial Ventures (NCV). He is seeing concessions of around one to two months in Atlanta, depending on the sub-market. NCV entered the Atlanta market in February 2006 with the purchase of the 486-unit Westminster at Windy Hill and the 440-unit Bristol Court and followed with the October purchase of the 380-unit Wood Chase in Norcross from Jupiter Realty for $24.9 million, or $65,526/unit. Wood Chase is located just outside the I-285 beltway, about a ten-minute drive from Downtown Atlanta, if traffic is light. Traffic is becoming a bigger concern in the Atlanta MSA and close-in properties are garnering higher rents than those farther out in the suburbs. The company, which typically spends around $5,000/unit on interior and exterior improvements, would like to purchase another 1,000 to 1,500 value-added units in Atlanta this year.

Stan Douglas, VP of acquisitions for RCMG Real Estate Advisors, said he wants to acquire 800 to 1,000 units in Atlanta this year by leveraging the 392-unit The Avenues, an apartment community the company picked up recently within the I-285 loop. He plans to focus his search outward from there into Atlanta’s Northeast quadrant.

RCMG paid a private local partnership $21 million, or $53,571/unit, for The Avenues, which was built on a site along I-85 in the 1960s. “This asset is a sub-market play. There are Class A deals going up around us as developers push out from Buckhead.” Because the sub-markets within the loop are close to economic employment centers, there’s more demand there from those who don’t want to spend long hours in traffic to get to work, said Douglas.

RCMG is an affiliate of K. Wayne Rice & Associates, a 30-year-old brokerage company that built its business around multifamily in California’s Central Valley and owns six assets in the Sacramento/ Woodland area. About five years ago, KWR expanded to Mississippi and Alabama. RCMG was formed last spring to bring in partners and leverage the existing portfolio.

RCMG’s key equity partner is Tiburon, Calif.-based Pacific Growth Properties, along with several high-net-worth individuals from San Diego. The company’s business plan includes selling its California communities and reinvesting the proceeds in the Southeast, starting in Atlanta and moving up into the Carolinas. Huntsville, Ala., where RCMG owns one asset, is on Douglas’ radar screen, as are Greenville, Charlotte, South Carolina, and the entire Triangle area of North Carolina. Douglas plans to capitalize on the growing migration of people who originally left New York and other Northeast markets to live in Florida and are leaving the Sunshine State and going half-way back, settling in the Carolinas. “These people are being called half- backs,” said Douglas, who expects to spend around $60 million on acquisitions this year.

RCMG entered South Carolina early last year with acquisition of the under-managed 180-unit East Ridge Estates in Greenville for $6.3 million, or $35,000/unit, and recently completed exterior improvements and added a fitness center there. Units are being upgraded as they turn, after which Douglas expects to push rents by $75/month. Upside also exists in pushing occupancy, which was 91 percent at close of escrow in a market where vacancies average 5.7 percent. Hediger Management is overseeing day-to-day operations at East Ridge Estates.