Investors are paying top dollar to buy apartments in Tri-City

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A buying frenzy hit the Tri-City apartment market in the final weeks of 2021.

Driven by tax considerations and lured by the strong economic recovery and low rental vacancy rates, investors have closed deals for complexes large and small, new and old.

Investors paid high prices and signaled confidence that future rent increases will justify their bets in Mid-Columbia’s rental market.

Mason Fiascone, a Paragon Group apartment broker, tracked eight deals worth 608 units and $100 million in December alone. Public and private records confirm that buyers have paid high prices, either to buy new properties or because they see opportunities to renovate old ones and raise rents.

Two seemingly unrelated sales offer insight into the value buyers see in the Tri-Cities.

Badger Mountain Ranch in south Richland and Irving Place Apartments in Kennewick have asked for prices that will bring similar returns to their respective buyers.

Fiascone represented the longtime owner of Irving Place, a Bend, Ore., investment group that sought to move 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 company.

Badger Mountain Ranch, 451 Westcliffe Blvd., is a 176-unit resort 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 unit prices reflect the different ages and the different amenities offered by the two properties. By one key metric, sales were nearly identical: cap rates. A cap, or capitalization rate, reflects the return on the investment, based on existing rents, and is similar to the interest paid on a savings account.

The lower the cap rate, the higher the price and the lower the return on investment.

Irving Place and Badger Mountain Ranch were both sold at cap rates of around 3.9%, well below the 5% to 6% level that indicates the deal’s breakeven.

“Wow is right,” Fiascone said of his deal.

Great interest in the Tri-Cities

December typically brings a flurry of year-end deals as buyers and sellers strike deals before the start of a new tax year. Even by that measure, 2021 was surprising.

“Interest in the Tri-Cities is at the highest level I’ve seen in my nearly 30 years of working in this market,” said Tim Ufkes, apartment broker at Marcus & Millichap in Seattle. Ufkes focuses on the Tri-City market, with a current focus on the Broadmoor area west of Pasco.

Several apartment sites on Broadmoor are under contract or have entered into agreements 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 gain major new employers. Jobs have been the big news for 2021, with employers such as Darigold Inc., Amazon, Reser’s Fine Foods, Local Bounti and others confirming plans to open new factories here. Costco is also expected to add a second store, in Broadmoor.

The Tri-City apartment vacancy rate was 1.3% in a fall survey covering more than 11,000 local units by the Center for Real Estate Research at the University of Washington. The average rent for one- and two-bedroom units was $1,275 per month.

Fiascone tracked 63 East Washington apartment sales in the second half of 2021, totaling nearly $333 million. The Tri-City deals accounted for $185 million of the total, more than half.

Its deal with Irving Place is a good example of what investors are seeing in the Tri-Cities. Fiascone credits economic growth and the fact that the population is now over 300,000 for putting him on the radar.

“There’s more capital that wants to find a home,” he said.

The former owner of Irving Place was an Oregon investment group looking to exit the Washington market and focus on less challenging investments, such as light industrial real estate. Once the group decided to sell, they wanted the deal to close by the end of the year.

Fiascone marketed it to four potential buyers. All visited. All offers submitted.

He called it a property with lots of upside – meaning it can be upgraded to command higher rents.

A $1.5 million investment in new paint, cabinets, counters, appliances, and installation of washers and dryers in individual units could raise the cap rate to a healthier level of 6, 5%. The complex commands average rents of around $900 per month. The current market rate for high-end units could push it over $1,300.

“There are a lot of opportunities for the buying group to make improvements, to bring it to market,” Fiascone said.

Badger Mountain Ranch is one of many newer resorts that have 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. Cap rate was not available, but another newer resort, The Tides at Willow Pointe, has earned a cap rate of 5.64% since 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 per unit, one of the largest deals per unit in the region.

Herron Lake was another example of older properties at high prices, although it had an intriguing history.

The 70-unit complex, 51 N. Edison St., was built in 1977. It sold for $10.5 million, or $150,000 per unit, in December. This buyer, a subsidiary of DJS Investments of Newport Beach, Calif., already owns the neighboring complex, Clearwater Bay Apartments. The deal brings together two complexes that were originally built as one and later separated.

The 3.5% cap rate on the sale of Herron Lake indicates that it made sense to group them together.

Fiascone said the unusual number of older properties changing hands is evidence of another aspect of the changing apartment market: skyrocketing rents and the challenges of dealing with modern tenant protection laws, including eviction bans during the pandemic.

“It’s harder to manage (little complexes) as a mom and pop without professional management,” he said.

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