Downtown hotel, in bankruptcy, sells for $49 million

By Lori Weisberg

Originally published May 26, 2011

The upscale Sè San Diego, mired in bankruptcy for nearly a year, has been sold for $49 million to Kimpton Hotels, a well-known operator of boutique properties throughout the U.S.

Proceeds from the sale, approved in U.S. Bankruptcy Court this week, will fall far short of what is owed not only to the original lender but also to a number of creditors, including the construction company and sub-contractors who worked on the $150 million project.

The debt owed by the owner, 5th Avenue Partners, was estimated to be between $50 million and $100 million when it filed for bankruptcy in June of last year. At the time, the company owed its German-based lender, WestLB, about $73 million.

When the hotel sale went to auction earlier this week, there were no other prospective buyers who outbid Kimpton, which also operates the Hotel Solamar in downtown San Diego.

The price paid for the Sè is clearly in line with recent purchases of high-profile properties in San Diego, including the 258-room W hotel, which recently sold for $56 million. Included in the sale are the hotel's 23 unsold condominium units and the attached House of Blues.

"The fact that it includes condos is a big plus for the buyer," said Alean Reay, founder of Atlas Hospitality Group. "And with a company like Kimpton that’s extremely well known in the boutique hotel brand, they can add tremendous value because they have a good following for their hotels in San Francisco, Los Angeles and the East coast.

"Eighteen months ago, I would have said $49 million is a very high price but today it’s a fair number and over the long term it’s a great investment for Kimpton.

Kimpton Hotels declined Thursday to comment on the acquisition.

The hotel sale is expected to close within the next week, but distribution of the proceeds remains a hotly contested issue, acknowledge attorneys representing the owner and the creditors.

Although $21 million was set aside for those holding liens against 5th Avenue Partners, that figure could change depending on the outcome of litigation by a number of creditors seeking reimbursement. Among those trying to recoup money is Highland Partnership, the general contractor on the Se hotel project.

"We are pleased that there is a pot of cash available to those creditors who will be able to establish that their liens have priority," said attorney Ali M.M. Mojdehi, who represents the creditors committee. "The outlook for creditors without liens is not bright, given the magnitude of secured bank debt in this case."

Attorney Marc Winthrop, who represents 5th Avenue Partners, explained that for now, WestLB is entitled to roughly $28 million, which represents the balance of funds beyond the $21 million being held in escrow. Also still to be paid are back hotel room and property taxes owed prior to the filing of bankruptcy, Winthrop said.

"The owner of the property borrowed a lot of money from WestLB to build the hotel," Winthrop said. "The contractors are entitled under state law to file liens if they’re not paid, and there are a number of mechanics liens by the general contractor and various trades and suppliers who believe that their liens are ahead of those of the bank, and that’s where the issue really comes up.

"We know that the $49 million will not pay off the $73 million (owed the lender), so for the workers with liens, their only hope of recovery is that their liens are ahead of the bank's."

Source: SignOnSanDiego

Echo Boomers Transform Multifamily Expectations

April 20, 2011

By Tim McEntee, Director, Wood Partners

The echo-boomer generation, born between 1980 and 1995, represents a significant retreat from the propensity-to-own mentality. Many of them have seen how their siblings or parents got caught up in the housing boom and bust, and they don’t want to make the same mistake.

Their living environments are far less tied to the conspicuous consumerism that was a trademark of the baby boomers. Those racks of CDs and shelves full of books that took up so much space in baby boomers’ homes are now stored on an iPod and a Kindle. Photo albums live on laptop hard drives. A pair of small high-end speakers attached to a computer has replaced racks of glowing audiophile components. As video-streaming technology improves, DVDs begin to go the way of the VHS cassette.

Technology is a top priority for the new generation of renter, and increasingly for renters of all demographics. Flat-screen televisions are ubiquitous in clubrooms and fitness centers, where iPod-docking stations, Wi-Fi, Wii hookups and an adequate amount of cardio machines during peak hours are mandatory.

Technology used to mean expensive hardwiring into each unit. That has become less important today than having hot spots in locations throughout the community where tenants want to use their laptops.

A key concept in unit design is “less space/more flexibility.” We are seeing smaller units with much more thoughtful design. Large computer desks with multiple shelves are not as prevalent. A decade ago we would have put fireplaces in 50 to 75 percent of units; today we might put them in 25 percent. Storage areas need to be more functional and designed with bicycles, golf clubs and (in some climates) snow skis in mind.

Community activities will continue to be an important amenity for the new generation of renter. A robust and well-conceived schedule of activities fosters relationships with staff and neighbors, creates a sense of community and helps with renewals. Cooking classes were hot activities at one time; now it might be a computer class or something based around movies. The newer generation sees value in social networking, but at some point they want to actually meet people, too.

Putting notes on apartment doors or on common-area bulletin boards to alert residents of upcoming events in today’s world is the equivalent of writing on cave walls. Now renters expect an active and dynamic social-media presence from their community. The tone needs to be immediate, informational, casual and conversational. If you place signage at nearby shopping districts to promote your opening, it needs to have a scannable bar code so potential customers can capture all your information with one click of a smart phone.

This is a generation that dines out, even in difficult economic times. At our new development, Alta Aspen Grove in suburban Denver, we are partnering with the restaurants at the lifestyle mall next door to have dinners delivered to our residents’ doors.

Easy access to mass transit is crucial, not the least because of sticker shock at the gas pump. Most of the projects we’re developing are within 1,000 feet of a mass-transit platform. That said, direct-access parking is a much-desired amenity today, and we don’t see that changing within the new generation.

Today’s renter is very attuned to environmental concerns. Our newest project, Alta Aspen Grove, is, we believe, the first LEED certified apartment community in the Denver area. That was an expensive investment, but being environmentally friendly and sustainable is going to become more important with every passing year. It matters not only to the customer, but also to investors and institutional buyers.  There are institutional funds right now that can’t buy anything without LEED certification from the U.S. Green Building Council. In 10 years, your property is going to be physically obsolete if you don’t have LEED and ENERGY STAR designations.

Attention to environmental issues carries over to the layout of the community. People appreciate passive spaces, park benches and picnic tables with gas grills at the edges of the community where residents can read a book, work on their computer or just relax.

Creature comforts need to include creatures. This generation is very pet-centric and expects to live in a community that reflects and respects their devotion to their animals. For example, a doggie wash may soon become a standard amenity. At Alta Aspen Grove we added a large stainless steel sink with folding steps, hot water and spray nozzles, as well as an adjacent dog park.

This new generation of renter poses challenges to old assumptions as well as burgeoning opportunities for multifamily housing’s future.

Source: Multi-Housing News Online

Mortgage Rates Reach Another Low for 2011

Daily Real Estate News  |  May 20, 2011  |

For the fifth straight week, mortgage rates inched down again--this time reaching the lowest level of the year as well as lowest year-to-date. The 30-year fixed-rate mortgage averaged 4.61 percent this week, while the 15-year rate averaged 3.80 percent, Freddie Mac reports in its weekly mortgage market survey.
The 30-year mortgage hasn’t reached 4.61 percent or below since December 2010. Last year at this time, it averaged 4.84 percent while the 15-year fixed-rate mortgage averaged 4.24 percent.
The falling rates may be yet another lure to buyers during real estate’s traditionally prime home buying season. Owning a home has also recently been found to be more affordable than renting in 78 percent of the major U.S. cities, according to the latest data from Trulia.
Mortgage applications, meanwhile, are increasing as interest rates continue to fall. Mortgage loan application volume increased 7.8 percent this week when compared to the week prior, according to the Mortgage Bankers Association. Refinancings hit the highest level since mid-December, increasing 13.2 percent over the prior week, while the purchase index for mortgage applications dropped 3.2 percent. 

Source: REALTORMAG

Southern California on Its Way Back to Health

By Brad Berton, Contributing Editor
May 3, 2011

Southern California apartment owners might collectively adopt an encouraging motto as they track the hard-hit regional market’s ongoing recovery: “We’re halfway home.”
“Southern California metros generally have regained about half the [multifamily] occupancy that was lost during the recession,” calculates Greg Willett, vice president of research at MPF Research.
But as multi-housing pros here prepare for another hot summer, Willett also points out that effective rental rate gains in Southern California have amounted to only half the nationwide average over the past year. More specifically, SoCal’s four primary markets experienced gains of just 1.5 to 1.8 percent—a pretty weak performance relative to the nationwide average of 3.2 percent.
The more comforting news: Slowly recovering apartment occupancies in the three big coastal counties have returned to more manageable levels. As Marcus & Millichap reports, prevailing average vacancies in Los Angeles, Orange and San Diego Counties range from the low-4s to the mid-5s—and falling.
The weaker exceptions are the hotter, drier Riverside and San Bernardino Counties, comprising the region’s boom-and-bust-prone Inland Empire. The vacancy rate there is still about 7 percent, but Marcus & Millichap projects a decline of about 70 bps by the end of the year.
“The Inland Empire is really struggling,” laments regional apartment owner Chris Mitchell, founder of Crown Acquisitions.
Elusive employment growth is a primary factor holding back apartment absorption out east and in the coastal counties. The Inland Empire’s unemployment rate is still scary at more than 14 percent, and even L.A. County remains over 12 percent.
The rate in San Diego County, where apartment occupancies are fairly tight at 96 percent, is still above 10 percent. But at least Orange County’s has dipped back into single-digits.
One factor that should further reduce vacancies—but won’t exactly help the employment situation—is that apartment construction in the region is at a fraction of historical production levels. Marcus & Millichap projects 2011 deliveries in the four primary Southern California markets to total 2,500 units—and nearly half of them will be in L.A. County. That’s a tiny amount of new product for a region with a population now approaching 25 million.
Perhaps predictably, given still-depressed rental rates and the supply-constrained region’s notoriously high land costs, only in rare cases today are market-rate developers encountering project economics that justify paying prevailing prices for development sites, observes Crown Acquisitions analyst Brett Bayless.
“If you’re not already land-banking, you just can’t justify what it costs to buy land,” he says. But that may change in the not-too-distant future as lenders that have taken back sites look to sell REO properties more aggressively, Bayless notes.
Even amid scant conventional apartment production, however, Willett concludes that SoCal won’t return to “true health” until 2013-2014. Nevertheless, REITs and other institutional buyers appear to be bidding for quality properties as if recovery in the regional markets was already well beyond the halfway point.
Indeed, with prospective buyers outnumbering acquisition opportunities in the region, institutional types are frequently paying prices translating to sub-5 cap rates for top-tier properties, relates Stephen Stein, first vice president overseeing Marcus & Millichap’s L.A. operations.
AvalonBay Communities, Essex Property Trust and UDR Inc., for example, have been active acquirers of large Southern Cal communities of late.
Developments built to condo specs, then converted to rentals as the for-sale sector cratered, are a particularly hot product among these players. For instance, Essex recently paid $80 million for Anavia, an 82 percent leased, 250-unit converted condo project in Anaheim.
Indeed, Mitchell perceives a clear “flight to quality” among active buyers in Orange County especially—with cap rates on some highly competitive transactions coming in as low as 4.5 percent.
Los Angeles County
While Marcus & Millichap projects continued gradual improvement in L.A. vacancies and effective rents, the economy isn’t exactly on fire. Job growth in L.A. has been tame and will likely remain muted into next year, laments Paul Darrow, a Marcus & Millichap associate.
“Unemployment is the elephant in the room here,” Darrow continues, adding that the situation stands to limit much in the way of rent growth over the coming years.
While strained budgets are cutting into public employment, Darrow and Stein identify a few economic bright spots. Health care employment is growing, and L.A. is seeing new restaurants and other start-up businesses taking advantage of the city’s depressed commercial rents.
The city’s signature industry is also helping fill apartments. “The entertainment sector is one growth area driving demand for apartments” in areas such as Hollywood, North Hollywood/Burbank and L.A.’s Westside, notes Stein.
Among few noteworthy new multi-housing developments, Alta and Jefferson are suddenly playing starring roles in Tinseltown. Wood Partners’ 218-unit Alta Hollywood just opened a few blocks from Oscars venue Kodak Theatre, following last June’s opening of JPI’s nearby 270-unit Jefferson@Hollywood.
Downtown L.A. is another bright spot given its employment trends and ever-burgeoning resident amenities. Architectural firm Gensler’s pending relocation from Santa Monica to downtown says a lot about the CBD’s attractiveness, Stein and Darrow agree.
After declining about 50 bps in 2010, L.A. vacancies should continue downward by another 40 points to end the year around 4.4 percent, according to Marcus & Millichap. RealFacts, meanwhile, reports that average overall asking rents are just over $1,600—up 2.8 percent from one year ago. And Marcus & Millichap projects a comparable hike in effective rents over the course of the year.
Orange County
Orange County’s comparably stronger economy and slowed-to-a-trickle development pipeline should generate more pronounced near-term improvements in occupancies and effective rents;
indeed “The O.C.” can expect a paltry 300-some unit deliveries over the course of 2011.
Unemployment here is 9.2 percent—well above normal economic times but at least better than elsewhere in SoCal. Strength of late is coming from the O.C.’s stronghold in leisure and hospitality, as well as professional and business services.
The environment here has been a contrast in renter demand between the luxury-level and Class B and C sectors, Crown’s Mitchell and Bayless relate. Local Class A owners got hammered with the loss of so many residents that made good livings in the subprime mortgage sector.
But as those jobs disappeared with the housing crash, these residents could no longer pay the rent in coastal communities, with many opting for densely populated inland and northern submarkets such as Fullerton and Buena Park, where rents are 30 percent or 40 percent lower, Bayless elaborates.
Meanwhile, tourism-related employment in North County has been rebounding as Disneyland and convention-oriented hotels are beginning to experience stronger visitation.
Average rents county-wide bottomed out below $1,475 in late-2009, according to RealFacts. The average improved somewhat over the following year, but then slipped from $1,492 to $1,475 during 2010’s fourth quarter.
Marcus & Millichap projects that the O.C.’s vacancies will decline a substantial 130 bps, to about 4.4 percent over the course of 2011, helping boost effective rents by 4.5 percent.
Currently, development plans are solidifying in the high-end commercial district near John Wayne Airport, in and around Irvine. AvalonBay and Mill Creek Residential have near-term plans for 500-some units, and Mitchell expects local powerhouse Irvine Co. to begin development of projects on nearby land the company has owned for decades.
Inland Empire
Apartment owners can take at least a bit of comfort in realizing the Inland Empire’s ranks among the nation’s most foreclosure-plagued markets; at least the area has seen thousands of former homeowners join the rental pool. Accordingly, with employment recovering, and a minuscule 600 new units scheduled for delivery during 2011, multifamily occupancies and rents are headed north.
The Empire is expected to post positive net employment growth this year, for the first time in a half-decade—although it will most likely be moderate to the tune of 16,000 positions, factoring to a 1.5 percent growth rate. Marcus & Millichap is projecting vacancies will likely end the year at a still-uncomfortable 6.3 percent—but that’s a 70-bp decline from the beginning of the year.
Rents currently average about $1,065, representing a recovery of about 1.2 percent since the market bottomed out, according to RealFacts. Marcus & Millichap, meanwhile, anticipates a 2.2 percent gain in effective rental rates over the course of 2011.
The Empire’s western periphery generally should see superior gains in demand as the
regional economy continues to recover, due to its proximity to employment centers in the coastal counties. Meanwhile, apartments in the more remote eastern submarkets will continue to face challenges.
But the Moreno Valley vicinity may well be a notable eastern exception here, as it should feel a surge in demand from workers building the massive $3.3 billion March LifeCare campus and the Sketchers mega-distribution center.
San Diego County
With employment strengthening and just 500 units slated for delivery this year, San Diego County’s apartment sector is in store for continued tightening—and likely some hefty near-term rent gains.
Marcus & Millichap is projecting vacancies will end the year approaching 3.5 percent, down from just over 4 percent at the beginning of the year. And effective rental rates are on track to rise a strong 4.7 percent over the course of the year.
San Diego rents haven’t declined to the degree seen in the rest of Southern California, as “the economic vacancy rate hasn’t fluctuated all that much,” Bayless observes. He’s seeing rents move upward at Crown’s properties there, although he characterizes the growth rate as “slow to moderate.”
RealFacts reports that average San Diego rents appear to have bottomed out about a year ago at $1,357. Recovery has been modest since, at roughly 1.5 percent.
The projected 2 percent employment growth in the county this year should push unemployment back toward single-digits—with the particular strength in higher-income industries, boosting demand for Class A rentals.
Recoveries in San Diego’s renowned biotech and telecom sectors bode well for ongoing employment recovery and renter demand, along with the military’s vast presence in the county, Mitchell relates. Meanwhile North County should see resurgent demand for Class B and C apartments, in particular, as construction of a major hospital at Camp Pendleton will require 1,000-some workers.

Source: Multi-Housing News Online