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SoCal's Decron Properties buys Mountain View apartments for $86M, plans $350M in Bay Area buys

By: Nathan Donato-Weinstein

David J. Nagel, president and CEO of Decron Properties, has a simple rule when it comes to investment: Go where the jobs are.

It's hardly unique, but it has worked for the family-owned investment firm for more than a half century. Now the strategy is leading the major Los Angeles-based landlord to the Bay Area for the first time.

Decron just closed on Highland Gardens, a 187-unit garden-style apartment community at 222 and 234 Escuela Avenue in Mountain View — a city that's bursting with job growth thanks to Google Inc., LinkedIn Corp. and Intuit Inc. The price? A hefty $86 million, or just shy of $460,000 a unit, for the complex originally built in the mid-1960s.

"We agree that it's an expensive market from a price-per-unit perspective," Nagel told me this week. "But it's worth paying the price per pound because we think the potential for rent growth is higher and will stay longer than any other part of the country.

"Why we're so enthused to invest in Silicon Valley is we think if the economy is a nine-inning game in the rest of the country, it's going to go extra innings in Silicon Valley," he said. "It's a 12-inning game there."

Decron's roots stretch to the 1950s, and its history starts with Jack M. Nagel, a Polish immigrant and Holocaust survivor who built homes for U.S. military veterans in Southern California. The company eventually got into apartments. David Nagel, Jack's son, joined in the 1980s.

The company, the investment arm of the Nagel Family Trust, also owns retail and office centers primarily in Southern California, but its major focus is apartments. The company invests capital on behalf of the family, while also bringing in some other investors.

This is just the first deal of several Decron is planning here. The company is in contract on two more projects in the Walnut Creek area that it expects to close by the end of the month. And it plans to invest another $200 million in Northern California this year.

Decron, which owns and self-manages more than 5,000 units mostly in Southern California, specializes in buying older complexes and upgrading finishes and amenities to boost rents — a strategy called "value-add". But because the properties are of a certain vintage, its communities can undercut new luxury complexes by up to 25 percent, Nagel said, while still offering what people want.

"Our focus is creating an environment where members of our community have opportunities to meet and greet and get to know each other," he said.

At Highland Gardens, seller Rockpoint Group and Maximus Real Estate Partners already undertook a multi-million-dollar renovation in 2012, after buying the community for $43.1 million. Decron plans to invest $2.5 million into the property, adding things like a Jacuzzi and spa, fire pits, and improved landscaping.

The property is located next to Rengstorff Park not far from where Merlone Geier Partners developing the Village at San Antonio Center, a major office, retail and apartment complex. Stan Jones, Phil Saglimbeni and Sal Saglimbeni of Institutional Property Advisors handled the brokerage assignment.

Decron isn't the only investor playing the value-add game. And given the depth of demand for apartment communities thanks to tremendous rent growth in the region, finding the first opportunity wasn't easy. Decron scoured the Bay Area for 18 months looking for the right opportunity to break in.

"It was an education to ourselves on the need to pay up to get into this market," Nagel said.

The community was purchased at an initial cap rate — a key measure of yield — in the mid-4 percent range. That number could climb as rents increase.

Rent growth in Mountain View has been in the double-digits for the last several years, but Decron is forecasting more conservative increases going forward.

"We think rent growth will average in the 5 to 6 percent range during out investment hold period," he said.

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