Bank-Owned REO Properties Are Bulk of Transaction Activity in East Bay
- Aug 11, 2010
Oakland Ca.–Apartment broker Joel Kelly and property owner/developer Metrovation have formed Bay Apartment Advisors, a brokerage and asset management firm focusing on the multifamily sector. Each of the team’s six brokers has migrated from larger firms in the Bay Area and have together sold in excess of 5,000 apartment units.
The group will serve primarily the East Bay apartment market.
BAA’s services include asset management, property acquisition & disposition, and 1031 tax deferred exchanges for multifamily investors. Kelly, who is the president of the firm, talks to MHN about how the group got started and what their goals are.
MHN: How did the group get started?
Kelly: We’ve experienced firsthand the continuous consolidation of the apartment brokerage industry and the resulting diminished services available to the client. Our decision to create a highly focused, multifamily investment sales and advisory group is in direct response to the aggregation of firms. While our competitors aim to obtain market share nationwide in every class of real estate, we are solely focused on apartment brokerage and asset management in the Bay Area. I started at Marcus & Millichap 10 years ago and in fact five of us are from Marcus & Millichap. Four years ago we went to a regional firm, which also did everything from apartments to industrial and retail. So we decided to partner with Metrovation, which was looking to expand into the apartment sector.
Metrovation & Bay Apartment Advisors independently owns and operates approximately 300 apartment or condominium units in the Bay Area and as a group understands the issues and intricacies of apartment buildings. They saw the need for a strong creative specialty real estate company that serves the multifamily sector.
MHN: What does BAA do?
Kelly: We want to bring a full service aspect to the multifamily sector, where we are managing as well as brokering deals. We call ourselves asset managers, but a lot of what we do involves working with owners of properties to manage for the upside, and once we have achieved that they are able to sell it or continue to manage it. We are trying to add value to the management side. We are more of a brokerage firm than an acquisitions firm. We are in the process of acquiring an 80-unit building.
MHN: How does BAA distinguish itself from other brokerage firms?
Kelly: We are an established team of brokers from bigger firms that always put the client before the firm. One thing that drove us away from the big firms is the ‘firm first’ attitude that prevails in large firms. It’s been refreshing for our clients that we are nimble—doing everything from asset management to listing and selling properties. In bigger firms, all you do is broker the deals. With BAA, we are consultants, and then if they hire us, we broker the deals too. We have retained all the old clients we had at the big firms.
MHN: Is there a specific market BAA is focused on?
Kelly: Our niche is the $1 to $10 million asset class within the East Bay. We prefer to work in the asset class that is prevalent in our niche—the mid-market class of apartment buildings.
MHN: How is the East Bay market doing?
Kelly: It’s been very slow. Much of the transaction activity has been bank-owned REO properties. We are an exclusive listing agency of Wells Fargo Wachovia in the East bay area, so we have sold a number of their properties. We have completed 25 of their transactions. But we feel the market will be slow through the next year. Buyers are coming back to the market, but frankly it’s difficult for a fray seller to compete with bank-owned inventory. So the asset class in which we deal will be slow in the foreseeable future.
Much of our business right now is listing and selling bank-owned properties. Most of them are distressed. We are selling them to value-add investors or vulture funds as they are called, for lack of a better word. They are buying them at typically about 60 percent of the value of the first trustee, and putting in 15 to 20 percent equity for improvements. Since the rental market here is pretty healthy, they are renting them out and getting cash flow of about 12 to 20 percent. We haven’t seen much flipping or people buying and trading. People are buying, renovating and then holding.
MHN: Why does BAA like the East Bay market?
Kelly: The East Bay is a very interesting market because it is literally four miles from San Francisco, where properties trade for $250 to $300 a square foot. The apartment rents are typically 30 to 40 percent higher across the board. Meanwhile, our properties trade at about $100 to $ 170 a square foot. There is real opportunity in the sense that we have access to capital from San Francisco, which is such a short drive.
Also, East bay has a very diverse job growth. The nations fourth-largest port is closeby; there is a big industrial area, which has blue-collar jobs; major campuses are located around here, and there are a ton of service sector jobs. So there is a huge rental base in the East Bay, and the values aren’t nearly as high as San Francisco. So entry point for investors is much lower here than in San Francisco.
MHN: How does the firm plan to grow?
Kelly: The most our team will grow to is seven or eight people. Currently, we have 40 clients with active transactions. Our plan is to focus on East Bay and we may potentially expand around the Bay Area. But we are purposefully trying to remain small and niche oriented. Our growth into different markets in the Bay Area would be through strategic partnerships, not expansion of our group.