The $23 million sale of the Cove Apartments in Federal Way last week is further evidence that the multi-family investment market may be starting to thaw, at least a bit.

Prometheus Real Estate Group's sale of the 312-unit complex to Kirkland-based Weidner Apartment Homes was the second sale this year of an apartment project with more than 100 units, but only the 10th such sale in the last 14 months.

Between 2005 and 2008, about 60 large complexes sold in the tri-county area each year, according to Dupre + Scott Apartment Advisors, a Seattle research firm. Last year, there were only eight sales.

“It was a thin year last year for anybody working the big stuff,” said firm principal Mike Scott. He thinks sales activity will be a little stronger this year, but he doesn't expect volumes will return to traditional levels for a couple of years.

“There's just nothing trading,” said Jon Hallgrimson, the CB Richard Ellis multi-family broker who put the Cove deal together.

He and Scott noted that a year ago, neither sellers nor buyers were interested in trading due to uncertainty over the economy. Now buyers are sensing that the market is bottoming out and are lining up to capitalize. That's sending prices up some, but not enough to satisfy sellers. Not only are asset prices still too low for sellers, but net operating income continues to fall, according to Hallgrimson, who says the attitude is “why sell now.”

He said most experts think rents will bottom out this summer when the major new developments wrap up, cutting off the supply of new product. Some 4,000 new units will hit the market this year; next year, that will drop to about 600, according to Scott.

Sellers' unwillingness to play will dampen sales volume this year, and the lack of new product will do the same in 2011, predicts Scott, who thinks it will be 2012 or 2013 before normal investment activity resumes.

With buyers perceiving this as a good time to invest, there will be some sales but not a lot. “We think volume will pick up slowly,” Scott said.

Weidner President Dean Weidner thinks the pace of sales could shoot up sooner. He cites the general feeling that interest rates will rise. Sellers will become more willing to sell as they balance waiting for anticipated higher asset prices against expected rate hikes.

There will be more opportunities for buyers in 2011 when more distressed properties that banks have taken back hit the market. Currently, some lenders are more solvent and can continue to carry the troubled loans, “especially the big banks that got bailed out” by the federal government, Hallgrimson said.

San Mateo, Calif.-based Prometheus, the largest private owner of multi-family properties in the Bay Area, developed the Cove in 1979-80. Two years ago, it donated the property to a charitable group, the Helen Diller Family Foundation. Helen Diller is the wife of Prometheus Real Estate Group Chairman Sanford Diller.

The foundation wanted to sell the property and, given the lack of supply, Prometheus decided now would be a good time to dispose of it, according to company Senior Vice President John Millham, who said the Cove received more than 15 offers.

Apartments at the Cove average about 825 square feet, and at the time of the sale the owner was getting approximately $1 per square foot in rent, Millham said. The occupancy rate is about 92 percent.

The cap rate on the deal was in the high 6 percent range, according to Hallgrimson. Cap rate, which is short for rate of capitalization, is the return investors anticipate getting on the cash they put into the deal. The higher the cap rate, the lower the purchase price. Hallgrimson said if the property had traded a year earlier, the cap rate would have been about 100 basis points higher.

Weidner's investment and management company provides rental housing and develops new housing from Texas to Alaska. The company bought the Cove, in part, because it owns three other properties in Federal Way. “We felt this was a good addition,” said Weidner, whose company owns some 6,000 units in the greater Seattle area.

He said the one major improvement he plans at the Cove is rebuilding the clubhouse. The estimated cost is $600,000. His company's construction arm, Complete Construction, will subcontract out the job.