Despite the economic slowdown, Modesto developer hopes luxury apartments will pay off

This isn't a great time to open a new apartment complex. Rents are stagnant, occupancy rates are down and the real estate market is a shambles.

But Wendell Naraghi remains excited about the 240 luxury rental units his family is building in northeast Modesto.

The Naraghi family is investing $35 million to $40 million of its money to develop the Villas at Villaggio, which is expected to open in July at Floyd and Roselle avenues.

"If you look with a long-term perspective, this will bring in a good return," Naraghi said. "It has been my family's tradition to look at the long term, not just at what can be made today."

That's how his parents, the late Hashem and Nora Naraghi, built the family fortune, which was based primarily in agriculture.

That explains why Wendell Naraghi compares building an apartment complex to planting an orchard: "When you plant, sometimes you don't see a crop for eight or nine years. We don't expect to see a return on this in the short term."

That patient investment strategy has paid off before for the family.

It built the 148-unit Marina Apartments in Modesto in 1991, which was near the start of the region's last big recession. But rental income from that project has more than doubled since then, Naraghi explained, and he's confident Villaggio will prove equally profitable.

"Eventually, (the real estate market) will clear up and everything will stabilize," Naraghi said. "This is a good investment on our own property, which we've owned for 30 years."

Since he and his sisters, Sharon Naraghi and Margaret Quattrin, financed Villaggio with proceeds from their parents' trust, they don't have stockholders or lenders demanding a quick return from the project.

That sets Villaggio apart, according to John Citrigno, a senior broker with Coldwell Banker Commercial in San Jose. He specializes in sales of Northern San Joaquin Valley apartment complexes.

"Villas at Villaggio will likely be the last conventional market rate (nonsubsidized) apartment property built in Modesto for quite some time," Citrigno predicted. "It may take longer to rent up than originally forecasted due to competition from single-family home rentals. But as the Naraghi family has such a low cost basis in the land and as this appears to be a quality new apartment community, it will likely be successful over time."

Modesto rents overall have been flat for two years, according to RealFacts, averaging about $812 per month. Villaggio units will range from about $950 to $1,300 per month.

Because Modesto rental rates are relatively low, Citrigno said the math wouldn't pencil out for other investors considering apartment construction.

"Market rents will have to increase 50 percent or more to support the full cost of any other competing product, so Villas at Villaggio will occupy the top tier for years," Citrigno said.

Few apartment complexes have been built in Modesto in recent years, and at least five rental projects were converted into condominiums and sold as individual units in 2005 and 2006.

Of the remaining rental projects, Villaggio's biggest competitor likely will be the 232-unit Brooks Landing, which was built a block away in 2006. Brooks Landing is at 3055 Floyd Ave., while Villagio is at 2929 Floyd Ave. Both are across the street from Village One Plaza, where Raley's is located.

A government-financed rental project for low-income families also is being built in that neighborhood. Called Town Center, the 20-unit development is at Roselle and Belharbour Drive, next to the shopping center. The Housing Authority of Stanislaus County expects it to open in June.

"This is a great location that was designated for multifamily housing since the start of Village I (more than 15 years ago)," Naraghi said. "We like being across from the new shopping center so people can walk instead of drive."

Villaggio will be a gated community, but it will have a pedestrian entrance near the roundabout that connects to Village One Plaza.

"We're exploring ways to work with Raley's to let our residents bring shopping carts here, then we'll bring them back," said Dennis Gerber, director of real estate for H. Naraghi Development. He is overseeing the 230,000-square-foot Villaggio construction project on 10 acres.

The development includes 11 buildings with individual units stacked two- to three-stories high, plus a clubhouse and recreational facilities.

Architecture Plus of Modesto designed the project, and three sizes of units are being built. Each has a gas-burning fireplace, full-size washer and dryer, private patio or balcony and energy-efficient features.

"This is going to be a gated community with good security that offers a very comfortable lifestyle with many advantages," Naraghi said.

He rejected the common perception that homeownership is the American dream and that money spent on rent is wasted because it doesn't build home equity.

"We certainly don't think it's wasted. Our tenants are making an investment in their everyday living," Naraghi said. "This is the preferred choice for many people."

"We've had a very good response from tenants so far," Naraghi said of Villaggio's preleasing activity. "We've taken many applications and gotten about 40 commitments."

While the first residents will move in during July, different phases of Villaggio construction won't be complete for about eight months.

Bee staff writer J.N. Sbranti can be reached at jnsbranti@modbee.com or 578-2196.

This story was originally published May 9, 2008 at 2:52 AM with the headline "Despite the economic slowdown, Modesto developer hopes luxury apartments will pay off."