Category: Los Angeles Multifamily

All SRO (Single Room Occupancy) units are not created equal in the City of Los Angeles. There are 3 main types – Bachelor Units, Studio Units and Single Units. Many use these three classifications interchangeably, however they are in fact very different as noted below:

• Bachelor Units: Bachelor Units are also classified as “Guest Rooms” on a Certificate of Occupancy (clearly differentiated from “Dwelling Units). They are the smallest and most compact of the three options. Bachelors are typically ~200 to 300 square feet and sometimes feature a kitchenette (but not always) and usually has its own bathroom. From a utilities standpoint, Bachelor units generally do not have in-unit gas appliances such as a range/stove. The appliances, if any, are usually electric. It is important to note that most Bachelor units are also not independently metered for gas or electricity – meaning that their utilities are usually paid by the owner (if they are not using RUBS).
  
  
• Studio Units: Studio units are slightly larger and more versatile than bachelor units. Usually there is no separation between the kitchen and the living/sleeping space. The kitchen is usually located on one of the walls and has a compact oven/stove top and full size fridge — if a refrigerator is included with the unit. Typically, a studio apartment is small, anywhere from 300-600 square feet. The bathroom is also separate from the room.
  
  
• Single Units: Singles are generally the most desirable of the 3 classifications. What differentiates a single more than anything is that it has has a separate space for living/sleeping and a separate kitchen which is outside of the ‘living space.’ If there is a wall with an entrance to the kitchen, the unit is a single. A single may have compact or full size appliances. A separate bathroom is included in a single apartment. Usually singles have a similar square footage as studios – approximately 300-600 square feet.

I bring this up because as I said above, some folks use these terms interchangeably when they are in fact different. When we market a property, we always make sure the owner specifies which type of unit we are dealing with, particularly because a ‘single’ or a ‘studio’ unit can almost certainly achieve more favorable rent than a ‘bachelor.’

Seven LA multifamily properties sell to a single purchaser in one of the few LA portfolio sales of 2023 so far.

Through a challenging market with sales volume down considerably, a thinning buyer pool and a tight credit environment, we were able to close a significant portfolio transaction consisting of 7 apartment properties totaling 94 units spread amongst four core LA submarkets – Mar Vista, Palms, Koreatown and Hollywood.

All 7 properties were subject to LA rent stabilization and were by all measures value-add properties, with current rents significantly below market and significant Capital Expenditures needed in the way of unit renovations, plumbing, roof, electrical and mandatory soft-story retrofits.

General Feedback From the Market

The general feedback from the diverse pool of purchasers was typical for a transaction such as this one, highlighted in few bullet points below:

• Systems Capex: Many prospective purchasers were skittish about the amount of systems capex needed (ie roof, plumbing, electrical and seismic) in addition to the standard unit renovations that would be necessary to achieve market rents. With the cost of construction, materials and labor still on the higher end, this was a legitimate concern for many prospects.
  
  
• Negative Leverage: With interest rates in the low 6s, much of the market pushback circled around the concept of negative leverage – ie the cost of debt for the acquisition loan exceeded the cap rate.
  
  
• Low Rents: As is customary with many value-add properties with legacy ownership, the current rents were significantly below market with upside of around 65% from current to market. Many were attracted to the upside, albeit harder to capture in today’s landscape.
  

• Attractive Basis: Many purchasers were attracted primarily to the blended ‘price-per-pound‘ basis of the portfolio, which was $186,170 per unit and $275 per SF. 46 units were located in Westside submarkets, while 48 units were located in Central/Eastside submarkets.

Healthy Buyer Interest
with Multiple Offers Generated

Through the marketing process of The LA 7 Portfolio, we attracted attention from the most active buyers in the LA market – both large and small. Most of the prospects were family offices and/or local syndicators.

• Throughout our competitive marketing process, we were able to attract attention from some of the most active names in the business. By our Call for Offers date, we had generated over 20 offers in various property combinations and price ranges – a few of the offers all cash.

• The properties were spread out over roughly an 11-mile distance (about an hour drive in LA traffic) from the western-most property to the eastern-most property. Some purchasers preferred only the Westside assets – while others preferred only the Eastside assets.

• The terminal buyer was a well-established operator with ~1,000 Units under management locally, who in the end acquired all 7 properties at the full asking price.

The Final Deal Metrics

Below are the final blended deal metrics for the LA 7 Portfolio:

• $17,500,000 Sale Price
• 7 Properties | 94 Total Units
• $186,170 blended price per unit
• $275 blended price per SF
• 12.4 GRM
• 4.5% blended cap rate
• Approximately 66% upside in rents from current to market
• Located in Mar Vista (2 properties – 20 Units), Palms (2 properties – 26 Units), Koreatown (2 properties – 36 Units), Hollywood (1 property – 12 Units)

We are currently evaluating similar Los Angeles properties and portfolios for local owners. If you would like more information on how we may assist, please reach out to me at ewong@greysteel.com

The LA 7 Portfolio

Many Landlords Consider Billing Tenants For Utilities via RUBS Program

As the cost of utilities continues to rise for LA landlords, many owners are considering the implementation of a Ratio Utility Billing System (RUBS). RUBS is a way for Landlords to manage their expenses by proportionately sharing utility costs with their residents. While RUBS is not without its critics, many landlords have found it to be an effective way to manage rising utility costs.

Utility Costs Surging

SoCalGas bills up 3x: Natural gas prices in California have increased significantly in recent months, driven by factors such as extreme colder weather events, supply chain disruptions, and an overall increased demand. SoCalGas, the largest gas utility in California, has warned its customers that bills for 2023 could be up to 3x higher than last year due to surge in prices.

LADWP not far behind: Not to be outdone, in 2022 The Los Angeles Department of Water and Power implemented rate adjustments on water usage, a move that has lead to higher bills for many customers. The change went into effect in January 2022 and primarily impacts residential customers who are the highest water users. LADWP uses a four-tiered pricing structure based on usage to determine the rates a customer pays for water.

Benefits of RUBS

RUBS typically proportionately divides water, sewer, trash, electricity, gas, or pest control utility costs among residents using a formula based on several factors including state and municipality regulations, size of units, and the number of occupants in each unit.  Some of the benefits are as follows:

• Tenant Cost Absorption: Tenants absorb the costs of their utility consumption as opposed to the landlord.
   
• Fair Cost Distribution: Utilitycosts are divided on an individual basis, making the process more equitable for tenants.
   
• Increased Net in Operating Income: Utility consumption contributes to a decrease of Operating Expenses leading to an increased Net Operating Income.
   

California does not currently have any laws that prohibit the use of RUBS and there are many companies that you can employ to implement RUBS at your property.  Additionally, there are also programs which can be purchased to independently implement RUBS. 

10793 Ohio Avenue
Los Angeles, CA 90024
7-Units | Just Closed in Westwood

We just closed this 7-unit multifamily property in the Westwood area situated south of Wilshire and just east of Westwood Boulevard. This was a property that had been in the family of the Seller for over 50 years. The Seller, like many other small operators in California, was fatigued by the heightened regulatory environment that accompanies apartment ownership in Los Angeles nowadays. The Purchaser was a local student housing operator who was in the midst of a 1031 exchange.

The property traded at sub 4% cap rate and roughly 16x rents. All things In the long run, owning apartments in West LA is generally one of the safer real estate investments out there. The location with respect to transit (and the ocean) are optimal. While the yields upon acquisition may be lower than elsewhere in the market, when all is said and done the rental demand is steady, the rents grow over time, and it’s still ‘The Westside.’

Newsom makes an aggressive pro-housing push in California

If there is one thing residents and landlords can agree on, it’s that California needs more housing. How much more housing? That depends on who you ask. State officials say California needs to ramp up production to 310,000 new housing units annually over the next eight years — a pace that’s 2.5 times faster than the current rate. CA Governor, Gavin Newsom, has taken a proactive approach in his recent passing of pro-housing legislative bills, a few of which are outlined below.

Assembly Bill 2011

• AB 2011 allows for ministerial, by-right approval for affordable housing on commercially-zoned lands, and also allows such approvals for mixed-income housing along commercial corridors, as long as the projects meet specified affordability, labor, and environmental criteria.
  
• The bill also requires that all projects seeking approval under its provisions ensure all construction workers earn prevailing wages and receive health benefits.
  
• With thousands of potential commercial sites across California, the bill would allow production of new affordable housing units at scale, without changing the density or character of existing residential neighborhoods. One recent analysis found the potential for 2.4 million units statewide.

Senate Bill 6

• SB 6 allows residential development on property zoned for retail and office space without needing a rezoning, and allows project applicants to invoke the Housing Accountability Act (HAA) to limit local discretion to deny or condition approval.
  
• However, SB 6 does not provide a ministerial approval pathway, and it requires applicants to commit to both prevailing wage and more costly “skilled and trained workforce” requirements for project labor (although the law provides an “off ramp” if fewer than two bidders bid for a contract under the “skilled and trained workforce” requirement).
  
• SB 6 does not contain any BMR requirements, and it has fewer site exclusions than AB 2011, and so it is likely to be used most frequently in lower-cost areas of the state and on sites where AB 2011 is not available.

Assembly Bill 2097

• This bill would prohibit a public agency from imposing any minimum automobile parking requirement on any residential, commercial, or other development project, as defined, that is located within 1/2 mile of public transit.
  
• Parking mandates, which require parking for cars to be included in new housing, are common in cities throughout California and can add $40,000 or more to the cost of construction per parking spot, while also increasing climate pollution.
  
• Eliminating these costly parking mandates will give Californians more choices about whether they want to pay for parking, or have lower-cost housing in walkable, transit-accessible neighborhoods. AB 2097 increases housing choice and will make it easier to provide lower-cost, walkable-and transit-accessible housing across the state.

536 N. Commonwealth Avenue
Los Angeles, CA 90004
Stabilized 4-Plex | Just Closed

We just closed a renovated 4 unit property located on Commonwealth Avenue in the heart of Virgil Village just south of Silver Lake. The property was constructed in 1980 and therefore not subject to Los Angeles Rent Stabilization – only to California’s less restrictive statewide rent control as governed by AB 1482, whereby the allowable annual rent increase is 5% +CPI as opposed to the blanket 3-4% increase imposed by traditional LA rent control.

Over the past few years, and in particular since the Covid-19 pandemic, we have seen a flight to properties that were constructed after 1978 (non-LA rent controlled properties), as dealing with LA rent controlled properties constructed before 1978 has become increasingly problematic with various city, county and statewide renter protections.

This unique property was in excellent shape and featured spacious 2 and 3 bedroom units averaging over 1,000 SF each, with ample on-site parking and a sprawling backyard often used for concerts. The 1031 Exchange purchaser, who closed all cash with a 30 day escrow, was attracted to the growing dynamics of Virgil Village in addition to the property’s near-stabilized rents. The details of the transaction are below:

536 N. Commonwealth Avenue. Los Angeles, CA 90019

– $2,300,000 Final Sale Price
– 4 Units |4,400 SF
– Two and three-bedroom floor plans
– Year Built 1980
– $575,000/Unit
– $518/SF
– 16.2 GRM
– All Cash transaction sold off-market to 1031 Exchange Purchaser

1241 & 1247 S. Dunsmuir Avenue.
Los Angeles, CA 90019
16 Units | Just Closed

We just closed a 16 unit value-add multifamily transaction, sourced off-market, which was located on the border Mid-Wilshire and Wilshire Vista neighborhoods of Los Angeles – two of LA’s well-established yet seemingly fast-growing rental submarkets. The property was located on South Dunsmuir Avenue near San Vicente Boulevard, a quiet tree-lined side street with a mix of single-family residential, multifamily (old and new) as well as small lot sub-divisions.

I like this area for a variety of reasons. It is close to major thoroughfares such as San Vicente Boulevard, Pico, Olympic, Fairfax, La Brea and it is a straight shot into popular parts of town like Beverly Grove and West Hollywood. Additionally, the real estate in this area is as diverse as the residents who populate it. As mentioned above, the properties in the area feature everything from new construction, to 1930s Spanish Duplexes, to charming SFRs and 1960s apartment buildings – the list just goes on.

This particular property, originally constructed in 1947, consisted of all one-bedroom floor plans averaging approximately 800 square feet, situated on an R-3 zoned 17,407 SF lot. The property was held by a family operator for over 30 years who like many other LA owners were seeking to transition to a slightly more hands-off investment out-of-state via a 1031 Exchange due to the heightened regulatory environment locally.

The purchasers were attracted to the value-add potential of the property in addition to its central location and proximity to areas like Beverly Grove, Beverly Hills and West Hollywood. The property was delivered with 2 vacancies which the Purchaser plans to renovate and lease at market rent, along with other improvements to the property. The details of the transaction are below:

1241-1247 S. Dunsmuir Avenue. Los Angeles, CA 90019

– $4,605,000 Final Sale Price
– 16 Units | 12,364 SF
– All one-bedroom floor plans
– Year Built 1947
– $287,812/Unit
– $372/SF
– 15.3 GRM

Additional Photos:

Douglas Emmett pays a record price for 1221 Ocean Avenue in the heart of prime Santa Monica

I don’t typically write about institutional transactions but this is what I would call a WOW price. Douglas Emmett, a firm that is very near and dear to me, paid a record-price for a multifamily asset in prime Downtown Santa Monica with the purchase of 1221 Ocean Avenue – which is certainly one of the most prestigious multifamily assets on the West Coast with unbelievable ocean views. The Seller was The Irvine Company, who had owned and operated the Class-A property for years. 1221 Ocean was one of a few assets that they own in Los Angeles – outside of their core market of Orange County.

Here are the deal Metrics:

• $330,000,000 Purchase Price
• 120 Unit Multifamily Property
• $2,750,000 per unit
• $1,800 per SF
• 98% leased at close
• 1,500 SF Average Unit Size
• Closed April 26, 2022
• Purchased in the low 3% Cap range
• DE plans to continue to significantly upgrade units and common areas

The deal was purchased via a new Joint Venture managed by Douglas Emmett in which they own a 55% interest. The property is a nice addition to the vast portfolio of Class-A office buildings which they own in the area, in addition to their sister multifamily assets also in Santa Monica – The Shores and Pacific Plaza. Congrats to my friends over at DE on this incredible acquisition!

Mid-City Los Angeles Continues to Stay Hot

Congratulations to the Buyer and Seller of this incredibly well-located 8 unit value-add property located in the heart of Mid-City Los Angeles’ Picfair Village (near the intersection of Pico and Fairfax). This pocket of Mid-City continues to stay strong in terms of multifamily investment sales and overall rental demand. Renovated 1960s-vintage one-bedrooms can easily achieve $2,000+/mo and two-bedrooms $2,800+/mo. For this property – there was approximately 45% upside in rents from current to market.

The Seller, as is the case with many local Sellers, was a generational owner who was fatigued by the ongoing stricter rent control laws and overall government regulation that is typical in the Los Angeles apartment business. They had recently allocated significant capital expenditures towards the completion of their mandatory seismic retrofit – a mandate bestowed on about 15,000 other local LA property owners who own 1960s properties with tuck-under parking spaces).

The marketing of this property saw a competitive process with multiple offers generated for the Seller, and ultimately went to a Buyer with an extensive real estate background. The Buyer was attracted to the overall growth of the area, which includes a 28-Unit new construction project on the two adjacent parcels. Among other things, he plans on immediately renovating the two vacant units – as well as building two additional Accessory Dwelling Units (ADUs) in the tuck-under garage spaces to generate additional income. The purchaser utilized short-term bridge financing to acquire the property.

Transaction Details:

• $2,200,000 Sale Price
• $275,000/Unit
• $364/SF
• One 2-Bedroom and one Bachelor unit Vacant at closing
• Financed with private bridge loan
• 45 day total Escrow

Among the many benefits of real estate investments are Income, Depreciation, Equity, Appreciation and Leverage.

One thing for certain in real estate investing is that different investors have different investment criteria in terms of what they are looking for in a real estate investment. There are investors that buy for cash flow. There are investors that are looking to park money for appreciation and bank on rent growth. There are investors that are looking to buy, renovate and quickly flip out of that investment.

If you are starting out, a great (and simple) place to start when evaluating the benefits of real estate investing is to refer to the old real estate acronym I.D.E.A.L.

Income

If you are buying investment property, at the very least that investment should produce some income in the way of cash flow. On a very basic level, here is how that works. Let’s take the following example for a multifamily property.

$1,000,000 Purchase Price
$80,000 Annual Gross Rents
($32,000) Annual Expenses

$48,000 Net Operating Income
($36,000) Annual Mortgage Payments

$12,000 Annual Cash Flow. Assuming you put down 30% and financed 70% that is about a 4% cash-on-cash return.

Depreciation

Real estate has many incredible tax benefits, but one of the best tax benefits is depreciation. Simply put, depreciation is a non-cash expense (effectively a tax shield) whereby an investor can shield from taxes most or even all of the rental income generated by this particular real estate investment.

Depreciation allows investors to spread out most of the cost of real estate purchases over a period of 27.5 years (for residential buildings). If you own a multifamily property and you have been utilizing the depreciation tax shield for over 27.5 years, you may consider selling as you will likely be paying significant taxes on your rental income. Once your property is fully depreciated, it may be tax-inefficient to own this particular investment property.

Equity

As you continue to make mortgage payments towards your investment property, you will continue to pay down the principal balance of your loan. As a result, the longer you own investment property, the more equity you will continue to accumulate both from the principal reduction and appreciation of the property itself.

Appreciation

Over the long run, real estate prices and rent tend to appreciate (i.e. increase in value) at a rate somewhat akin to inflation (~3-4% per year) – sometimes greater in core markets like Los Angeles. This is known as passive appreciation. And while it might not sound like much, when combined with the other benefits and when compounded over long periods, passive appreciation can build enormous wealth.

On the other side of the appreciation coin, is active appreciation. Active appreciation is achieved by actively putting a plan in place to increase the value of your property. In Los Angeles, and in particular with Rent-Controlled properties, this may come in the form of offering cash-for-keys (aka tenant buyouts) for lower paying tenants. Once those units are vacated, many investors will allocate capital towards renovating these units in order to achieve at or above market rents.

Leverage

Most real estate transactions are acquired using leverage (or loans). The power of leverage cannot be understated in real estate. Taking the example above, you can put 30% down and control a $1M asset. Leverage can significantly amplify the returns on your cash invested. But on the flipside, leverage can also magnify your losses significantly should the market go south.

A lifelong Westsider moves to the Eastside.

I finally did it.  As of February 2021, I moved to North East Los Angeles or “NELA” as the cool kids call it.  You can officially call me an Eastsider.  Specifically, I moved to Highland Park.  If you are in the real estate world locally, you have probably seen deals in Highland Park – or at least you have heard of the area.  And if you already own property in the area, you might be thinking that it is already too late to be buying in Highland Park, let alone writing this post.  But for those that don’t know, Highland Park is an old part of Los Angeles. In fact, it’s among the oldest – one of the very first subdivisions of Los Angeles to be exact. It is located just West of Pasadena, adjacent to Eagle Rock and just north of DTLA.  I spent virtually my entire life on the Westside of Los Angeles. Living east of the 405 was a foreign concept to me. But when it came time to purchase a home, staying on the Westside and paying $2 Million for a 2-Bedroom teardown simply wasn’t an option, so my fiance and I packed up from the Westside and headed East.

Now that I’m here, I can honestly say that I love Highland Park.  Here’s why….

1) Highland Park is Very Accessible 

Highland Park is very accessible to areas such as Pasadena, Glendale, Downtown Los Angeles and the San Gabriel Valley.  I never thought I would hear myself say what a benefit it is to live close to Pasadena, but the fact is that Pasadena is absolutely stunning and has every major high-end retailer you would find in any foremost part of Los Angeles.  From a transportation standpoint, Highland Park is serviced by three freeways (the 110, 134 and the 2 which takes you directly into Echo Park/Silverlake).  The L.A. Metro Gold Line has a station just north of Figueroa Street, and can get commuters downtown in about 35 minutes. My place is approximately a 7 minute drive to Dodger Stadium with no traffic.  

2) The Restaurants and Bars are Amazing in Highland Park 

Drive through Highland Park and you will find some of the best and most unique restaurants and bars in all of Los Angeles.  There are very few chain operators in Highland Park.  Instead you will find spots like Hippo, Homestate, Joy, Donut Friend, Goldburger, Pocha, Gold Line, Good Housekeeping and so many others.  The entire area feels uniquely homegrown and very entrepreneurial.  

3) The Real Estate is Unique And Getting Better by the Day 

From a multifamily standpoint, Highland Park is not the biggest market, but if you own a multifamily property in the area, you can achieve very attractive rents.  For properties 5+ units, there are less than 500 properties in the entire zip code of 90042 totaling just shy of 6,000 apartment dwelling units.  Most of these properties were constructed prior to 1960 – in other words, the housing stock is old.  That said, the average rent for a one-bedroom in Highland Park now is $1,873.  By way of comparison, I am leasing a small renovated one-bedroom in West Los Angeles for $1,895.  A multitude of historic restrictions make it tough to develop in Highland Park, but if you are turning an old multifamily property, you can expect to get very high rents.  From a Single Family Residential standpoint, new homebuyers in Highland Park are folks who are generally priced out of areas like Silver Lake and Echo Park (or in my case, The Westside). It is not uncommon for houses to go for as high as $800 per square foot – which is comparable to some houses you would find in areas like Sherman Oaks, Culver City or Mar Vista.  From a retail standpoint, the main streets in Highland Park (particularly Figueroa and York) are teeming with very cool independent shops and restaurants.  It feels like you are walking down Rose or Abbot Kinney in Venice, although Highland Park seems to have less of a homelessness issue.

4) The People Are Great

The Highland Park crowd is an incredibly diverse mix of established locals and newer transplants alike. There is a strong sense of community and generally speaking people do not seem to take themselves too seriously. You can come as you are and you can be yourself.

Long story short, Highland Park is clearly no secret at this point. Simply put, it is an incredible Eastside Los Angeles submarket where from an investment property standpoint, you can achieve rental rates that are comparable to other high-rent areas around town.  Where Highland Park goes from here, only time will tell.  But I have a feeling that direction is up.