Prudential Just Made Its Biggest Multifamily Purchase on the West Coast
Real-estate investment arm of the firm buys a 50% stake in a $500 million Bay Area apartment portfolio. The CityView ArcLight is part of a $500 million portfolio of apartment buildings in which PGIM Real Estate recently purchased a 50% stake.
The San Francisco area multifamily market has been one of the most closely watched in the country in the years following the recession. Several times during the recovery, annual rent growth rates were in the double digits in some parts of the Bay Area.
The real-estate investment arm of Prudential Financial Inc. PRU -1.39% is buying a 50% stake in a $500 million rental apartment portfolio in the San Francisco Bay Area, its largest-ever multifamily purchase on the West coast.
PGIM Real Estate is buying the stake in a portfolio of roughly 750 apartments concentrated in and around San Francisco, partnering with the developer and manager of the properties, Los Angeles-based CityView. The seller is a public pension fund, the Los Angeles County Employee Retirement Association, which will continue to own the remaining 50% stake.
The market began to cool in 2016. There were even some cases of rents falling in San Francisco. Today the market is stabilizing, albeit with rents at high levels. Bay Area pricing has increased a total of 51.5% since the beginning of 2010.
An average apartment in the Bay Area currently rents for just under $2,700 a month, up 2.5% from one year ago, according to RealPage . That increase is roughly in line with inflation.
Investor appetite has remained strong in apartment markets throughout the country, even though across the U.S. rent growth is slowing and vacancy rates are rising.
PGIM executives say they saw a unique opportunity because of the high barriers to development in prime locations in San Francisco and surrounding suburbs like Menlo Park and Berkeley, where the buildings are located. The buildings in the portfolio were developed between 2012 and 2017.
“If you were to try to build these assets, these markets are hard to find development opportunities,” said Alfonso Munk, Americas chief investment officer for PGIM Real Estate.
PGIM is also looking at investing in other assets that CityView develops along the West Coast in places such as the East Bay in the San Francisco Area and Koreatown in Los Angeles.
The San Francisco market is facing headwinds from new supply and growing frustration among tenant advocates with how far rents have risen this cycle. Investors in California are weighing the risks that voters in November will decide to repeal Costa Hawkins, which would allow municipalities to expand rent control to newer buildings, such as the one in this portfolio.
Some investors have been selling off properties fearing the impact on the market. While most parts of the Bay Area have seen little new development, there have been a few areas, such as SoMa near the city’s financial district, where developers have been able to push through projects.
There are some 11,000 units currently under construction in the Bay Area.
“A lot of people panicked when we got a lot more supply than typical and job growth slowed down a bit,” said Jay Parsons, a vice president at real estate software and analytics firm RealPage. “Some sanity has been restored a bit in San Francisco.”
Sean Burton, chief executive of CityView, said all of the buildings are virtually fully leased because they are well located.
“The fact that rents have flattened out is not bad. At some point we run into affordability issues. At some point we like markets that go through some rental adjustment. These assets are pretty resilient,” Mr. Munk said.