Last month, UDR assumed the ownership interest of a 173-unit lease-up property in Oakland, California, built by developer Mill Creek Residential after the Atlanta-based developer told the REIT it would not fund its share of a capital call, according to the Highlands Ranch, Colorado-based REIT’s fourth-quarter earnings release.
“We did take the keys back on that asset as the developer didn’t want to continue to support the cash flow shortfalls,” UDR President and Chief Financial Officer Joe Fisher said on the REIT’s Q4 earnings call earlier this month.
In April 2019, UDR provided $45.2 million in preferred equity to Mill Creek to construct the property, originally known as Modera Lake Merritt. The REIT began consolidating the joint venture in December 2023 and recorded a non-cash investment loss of $24.3 million after the developer gave up its equity interest.
UDR rebranded the year-and-a-half-old property as Residences at Lake Merritt in January. The community was appraised at $67 million or $387,000 per unit, according to Fisher. Currently, the asset, which includes studios through two-bedroom units, has rents ranging from $1,779 to $3,130 a month before concessions, according to Apartments.com.
UDR expects initial yields on the asset in the mid-3% range. Once it is stabilized and the concessions burn off, they should rise to a “more palatable” low-5% range, according to Fisher.
A difficult market
When providing capital to developers, Fisher said there are usually three kinds of risk. One is delays in development. Another centers around supply and rents. The third revolves around the capital markets component, including interest rates, cap rates and capital availability.
“Clearly, any one of those factors is not going to be enough to drive distress on any of these deals,” he said. “But when you kind of get a couple of them that stack up, you do run into a little bit more distress, which is really what happened with Modera Lake Merritt.”
The situation in Oakland and the rest of the Bay Area is challenging for apartment owners. Renters moved away during the COVID-19 pandemic, and many haven’t returned. In the Residences at Lake Merritt’s submarket, two to three months of concessions and rent declines of 30% compared to before the pandemic are the norm, according to Fisher.
Despite the challenging market conditions, UDR will hold onto Residences at Lake Merritt for now. “We do think there is quite a bit of upside, be it through real estate tax resets, other income, obviously, burning off concessions and getting it stabilized,” Fisher said.
Currently, Northern California and Oakland specifically are challenged from a transaction market perspective, according to Fisher.
“I’m not sure you optimize price and value by simply trying to liquidate,” he said. “I think it’s better to keep it in our operations team’s hands for a couple of years and then evaluate down the road when the market is a little bit better.”
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