Rising Rents in Silicon Valley Attract Multifamily Investors

Originally published by The Registry

By Nancy Amdur

Rising rents and strong demand in Silicon Valley’s multifamily sector is helping to draw investor interest in the market. Among recent deals were newly formed investment group FortBay, LLC’s $145 million acquisition of a 208-unit apartment property in Mountain View and Essex Property Trust’s $92.8 million purchase of a 183-unit apartment community in North San Jose.

Los Gatos-based real estate investment and development firm FortBay, in a joint venture with Colony Capital, Inc., purchased the Village Lake Apartments at 777 W. Middlefield Road in an off-market deal. The property, built in the 1960s, sits on 9.8 acres and is bordered by Shoreline and Moffett boulevards. Braddock & Logan sold the property for about $697,000 per unit.

Village Lakes already has the city’s “gatekeeper” approval, which allows FortBay to apply to redevelop the site with up to 60 dwelling units per acre, said Lance Tate, principal of FortBay. The property is about 95 percent occupied.

“Mountain View is underserved in residential, and that is attractive to us,” Tate said, adding that the company seeks to acquire value-add assets in supply-constrained markets with strong demand and employment growth. The company also may do ground-up development.

Village Lakes is within a half-mile of Mountain View’s North Bayshore employment hub, occupied by Google, LinkedIn and close to other major employers, including Symantec. It also is close to the city’s downtown and Caltrain station. Most apartments at the property are one- and two-bedroom units and rents range from about $2,800 to $3,400 per month, Tate said.

“The property presents a unique opportunity to invest in one of the nation’s most competitive and sought after real estate markets,” said Tom deRegt, a principal of FortBay, in a statement.

FortBay is headed by experienced Bay Area real estate professionals Tate, deRegt and Perry Hariri. The company is seeking more acquisitions “almost exclusively” in Silicon Valley and expects to close another transaction during the first quarter of 2016, Tate said. FortBay will invest in residential projects but also seeks office and retail investment opportunities, Tate said.

Eastdil Secured served as FortBay’s financing advisor and sourced senior debt from Acore Capital.

In San Jose, real estate investment trust Essex purchased the Enso apartments at 175 Baypointe Parkway for about $507,000 per unit from Fairfield Residential, according to public records. The property opened about a year ago, said Mark Leary, a San Francisco-based principal with ARA Newmark, which represented Fairfield in the transaction. The property, home to many employees of local technology firms, was 97 percent occupied at closing, he said.

North San Jose’s residential market may experience increased demand as more companies are moving into the district. Samsung Electronics Co., Ltd. in September opened a 1.1-million-square-foot office campus at North First Street and Tasman Drive, and Apple is working on plans for more than 4 million square feet of office and industrial space on a site bordered by Guadalupe and Orchard Parkways and Component Drive.

“You’re going to see a lot of job creation there and it’s going to become a more and more popular place to live,” Leary said.

Additionally, the city has nearly maxed out its 8,000-unit residential cap allotted under the first phase of a city development plan for North San Jose. “So that becomes a really enticing opportunity for investors,” he added.

The Bay Area’s multifamily market is one of the “safest” sectors for investment because “you don’t see the big [vacancy] swings like you do in office,” said Justin Bautista, an executive managing director in real estate brokerage Cushman & Wakefield’s Palo Alto office. In Silicon Valley, the apartment vacancy rate is about four or five percent, he said. The average asking rent in Santa Clara County was $2,623 per month for the third quarter of 2015, up 10.7 percent from the previous year, according to a report by Cushman & Wakefield.