For more than a year now, private buyers have scooped up what few distressed assets have actually hit the market. But this week, Palo Alto, Calif.-based Essex Property Trust's deal of a California condominium development shows that REITs may finally be using their ample liquidity to recapitalize real estate.

Essex entered the distressed market by buying the DuPont Lofts, a 115-unit condominium development project in Irvine, Calif., for $27 million. The company will have to put an additional six months of construction and estimated completion costs of $6 million in the 85 percent completed project.

The company originally lost the deal last year, but after the first buyer fell through, Essex's all-cash offer won over Los Angeles-based Cathay Bank. “There is the certainty that a REIT can perform,” says Alexander Goldfarb, associate director of equity research of REITs for New York-based Sandler O’Neill + Partners.

When completed, Essex will have a project with condo features, but in a market that’s current struggling. DuPont Lofts, one four-story building over two garage levels, has units featuring 11-foot ceilings, custom finishes, washers and dryers, and a fireplace.

“This unique transaction afforded us the opportunity to acquire a condominium quality property in a desirable location that was priced well below replacement cost. Additionally, the high-end finishes at the property coupled with the large renter population in the immediate area, lead us to believe that the asset will successfully be able to command premium rent once completed,” says Craig Zimmerman, executive vice president of acquisitions for Essex.

Analysts aren’t quite as excited, though. “The price per unit (after they spend the remaining dollars to complete it) indicates they got a decent deal, especially considering the finish level,” says Andrew J. McCulloch, an analyst for Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm. “But Orange County is still a tough market right now though.”

While the deal won’t have a huge impact on earnings, it (along with a Memphis, Tenn.-based Mid-America Apartment Communities deal completed last year) could be a harbinger of things to come. “Hopefully this is the early stages of the cleansing process, and we see more of these types of transactions, but it does take a long time for these deals to come about,” Goldfarb says.