The motto “Cash is king” is truer than ever right now, especially for investors looking to snatch up distressed and under-valued commercial real estate properties. And real estate veterans Rory Gardner and Steve Heimler said they have plenty of it to purchase multifamily properties throughout Southern California. The duo formed Calabasas-based Keystone Investment Partners last summer. The firm is looking to purchase 500 to 1,000 multifamily properties per year over the next five years in San Fernando Valley, Los Angeles and further south in California. It’s also looking for properties in Hawaii. “We were looking to do something a little more entrepreneurial,” said Rory Gardner, principal of Keystone, who used to work as an analyst and partner/managing director at Pacific Property Company. “Steve and I felt like it was a great time to take a little risk, because there are many firms playing defense right now.” Gardner and Heimler are investing their own capital, assembled a group of high net-worth investors, and will be working with institutional investors on some of the larger deals. Heimler founded Cirrus Asset Management in Calabasas. The firm owns and operates real estate investments in multiple states, and is the property management affiliate of Keystone. Prior, Heimler co-founded and eventually sold Stratus Real Estate Inc. Gardner said the group is looking at properties as small as 30 units and as big as 400 units. The firm is considering purchasing distressed multifamily assets, but is also looking for stable but undervalued complexes. To date, Keystone has not closed on a purchase. Values have dropped “There are fewer players bidding for stable properties right now, while in the highly distressed category people are tripping over themselves,” said Gardner. It’s a good time to buy stable properties because rents have come off their highs and property values have dropped, he added. As job growth returns, demand will increase for apartments. In the greater San Fernando Valley area, the firm is especially interested in purchasing rent controlled and non rent controlled multifamily properties in areas such as Sherman Oaks, along Ventura Blvd, Northridge and Chatsworth. “The decision-makers are all here in this office,” said Gardner. “And we’re working with longer term investors.” Apartment inventory and vacancies in Los Angeles County, which includes properties with 20 or more units, are steadily climbing and average rents decreasing, according to the most recent data from Reis, Inc. Inventory was 755,950 (sf/units) in the third quarter of 2009 compared to 754,392 in Q3 2008, and 747,975 in Q3 2007. The vacancy percentage in Q3 was 5.4, compared to 4.3 for the same period in 2008 and 3.6 in Q3 2007. And the blended average rent for the region was $1,413 in Q3, down from $1,468 for the same period in 2008. It’s a tough time for mom and pop shops because of the drop in property values and lack of access to financing, said Jim Fisher, partner at Lee & Associates and head of the company’s multifamily division. “The problem is there’s so much debt and mom and pop companies can’t take money out to buy another building,” said Fisher. But he said there’s a ton of institutional money and large private investment partnerships out there. And Keystone’s capital stack is not unlike 90 percent of the other investment groups. Mixed bag Multifamily sales are also a mixed bag right now. Tony Azzi, senior vice president of investments for Marcus & Millichap, said Keystone’s plan is very aggressive, but he questions whether there’s enough inventory to support that rate of investment. There are not a lot of larger multifamily properties on the market, he said. The majority of deals right now are below $5 million. And Azzi is seeing very few deals happen with institutional investors. “The market is back to the ‘Three D’s,’ where the only sales that are happening are from distress, divorce or dissolution,” said Jeffrey Peldon, managing director of RE/MAX Commercial Associates in Agoura Hills, who is helping source inventory for Keystone. And there are a lot of investors still standing on the sidelines waiting for the bottom to fall even further, he added. In a healthy market things are trading and there are up-values. But this may all play in Keystone’s favor, he said. The company has access to capital and is fairly conservative. It’s looking at holding properties for the long-term versus just flipping them and making a quick return on investment. This will allow the firm to seek out some of the less obvious deals.
