Category: Los Angeles Multifamily

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Los Angeles Multifamily

Closed Transaction – 1264 South Spaulding Avenue. 6 Units

6 Units Closed in Wilshire Vista

We recently represented a Seller of 1264 S. Spaulding.  Los Angeles, CA 90019,  a 6-unit property located in the coveted Wilshire Vista neighborhood of Los Angeles, which is East of Fairfax, North of Pico Boulevard, around San Vicente Boulevard.  I like the Wilshire Vista area for many reasons.  At the forefront of those reasons is the overall aesthetic and charm of the surrounding neighborhood. The tree-lined streets in the immediate vicinity (Orange Grove Ave, Genesee, Ogden, Stanley etc) are very single-family residential (SFR) in nature. This area is not densely populated with apartments, so if you own a multifamily building in this area, there is not a lot of competition in the neighborhood when it comes time to lease units.  

The unit mix of 1264 S. Spaulding consisted of all one-bedroom floor plans averaging close to 1,000 SF per unit – each unit with a dining room which is a characteristic indicative of 1930s construction, which is when this particular property was built.   The Buyer, who is a local family office with close to 1,000 units under management, plans to potentially convert these one-bedroom units into two-bedroom units – the thought process being that a one-bedroom unit in this area could fetch about $2,000/month whereas a two-bedroom unit could fetch closer to $2,700 – $3,000.  This small incremental difference in monthly (and annual) rent ends up amounting to major dollars when it comes time for the property to be valued for either a sale or a refinance.  In addition to these conversions, the Buyer plans to construct and Accessory Dwelling Unit (ADU) in the parking garage thereby creating an additional unit and income for the property.

While in fairly good condition, this property was un-renovated and lacked most of the features that today’s renter is looking for. The Buyer was attracted to the quality of the neighborhood and the fact that the building was delivered with 3 vacancies allowing them to go to work immediately on renovating those units without having to deal with existing tenancies.

The Seller was a long-term owner/operator who like many property owners was fatigued by anti-landlord legislation in California and Los Angeles and figured it was time to move on, a story that I hear quite frequently in the LA multifamily market.

Transaction Details:

  • $2,000,000 Sale Price
  • 6 Units
  • 5,794 SF
  • $333,333/Unit
  • $345/SF

View additional photos of 1264 S. Spaulding below: 

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Los Angeles Multifamily

Beware of ‘Cap Rates’ as advertised

If you have seen an advertisement for an investment property, chances are you have come across a term called a “Cap Rate.” Simply put, a Cap Rate is an annual return on a real estate investment without taking your loan payments into consideration. It is arguably one of the most common metrics that real estate investors use when evaluating a small (or large) real estate investment.

A very basic example of how a Cap Rate is calculated is as follows on a $1,300,000 Purchase of an Investment Property:

$100,000 Gross Rents Annually

($35,000) Expenses Annually

$65,000 Net Operating Income (Gross Rents Minus Annual Expenses)

5.0% Cap Rate (Net Operating Income/Purchase Price)

Seems easy enough, right? Be careful. One of the problems with evaluating a multifamily investment strictly on Cap Rate is that Cap Rates can be manipulated simply by manipulating expenses. Take the example above for instance – let’s say whoever is advertising this deal published “Utility” expenses that were $10,000 less than they actually were on an annual basis. That would make the annual expenses for this deal $45,000 (instead of $35,000) and thus make the Cap Rate 4.2% instead of 5.0%. By way of comparison, the “Price per Unit” metric cannot be manipulated – that is simply the purchase price divided by the number of units.

A common mistake that some folks make when calculating a Cap Rate (at least in LA) is not accounting for reassessed property taxes for the Buyer. A Buyer who is purchasing a property from a Seller who has owned the property for 30 years is going to pay vastly more property taxes than what the Seller was paying – because in LA County, property taxes are assessed at roughly 1.25% of the Purchase Price upon sale. Property taxes can account for as much as 50% of a Buyer’s total annual expenses. So whatever amount the Seller was paying for property taxes is virtually meaningless to the Buyer. Some do not account for this adjustment and use the Seller’s current property taxes in their underwriting which can swing a Cap Rate astronomically and ultimately be very misleading.

While a Cap Rate is certainly an important metric, you should be wary of relying on the cap rate that is advertised.

Categories
Los Angeles Multifamily

Stunning Features of the Los Angeles Spanish Duplex

Simply put, Los Angeles is home to some of the most stunning duplexes that exist.  Whether you are in Los Angeles, Beverly Hills, West Hollywood, Carthay or West Adams you are bound to come across the multiple styles of stunning duplexes the city has to offer.  Perhaps the most coveted is the two-story, stucco, red-tiled roof with an upstairs and downstairs unit.  These structures were originally designed to mimic single family homes largely to accommodate population growth in LA.

We are currently marketing 1087 S. Genesee Avenue. Los Angeles, CA 90019 – a gorgeous 1930s built Spanish Revival Style Duplex.  These types of duplexes can be found in select pockets of Los Angeles (this one in the heart of Wilshire Vista).  The unique design sensibilities of this duplex include features like a red-tiled roof, exterior stairways, verandas, decorative edging around windows, and stunning archways throughout.

Many tenants in the market for rental housing love the charm and design features of units such as these, many of which are large in nature – this one boasts units which are 2,000 SF each, the upper unit of which will be delivered vacant.  Would-be homebuyers like them for the owner-occupancy potential…live in one and rent out the other to subsidize the mortgage.  Either way, their beauty is undeniable. 

1087 S. Genesee Avenue. Los Angeles, CA 90019

Listed at: $2,095,000
Building Size: 4,136 SF
Unit Mix: Two Units – Each 3-Bedroom, 2-Bathroom. Delivered with upper unit vacant.

See additional photos below.  Contact me at ewong@greysteel.com for further details.

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Development Los Angeles Multifamily

3 Los Angeles Real Estate Developments You Should Know About

Take a look at these 3 major real estate developments happening around town right now. If there is one thing for certain in Los Angeles, it is that the skyline is changing.

The Landmark, Brentwood

The Landmark

  • Developer: Douglas Emmett
  • Type: Multifamily
  • Area: Brentwood
  • Status: Near completion
  • The Deal: 34-story building built on the former Pavillions lot, consisting of 376 apartments – which includes 19 affordable units – above a 1,000-car garage.
Television City Campus – Beverly Grove

TELEVISION CITY CAMPUS

  • Developer: Hackman Capital
  • Type: Office and Studio Space
  • Area: Beverly Grove (Fairfax and Beverly)
  • Status: Planning
  • The Deal: The reimagined 25-acre studio complex will feature more than 1.1 million square feet of new office space and production facilities, The plan also calls for the construction of a new mobility hub, above- and below-ground parking, the implementation of a a transportation demand management program, and public realm improvements along the exterior of the campus.
The Grand – Downtown LA

THE GRAND

  • Developer: Related
  • Type: Multifamily/Hotel
  • Area: Downtown Los Angeles
  • Status: Under Construction
  • The Deal: Two towers (39-story and 20-story) totaling 436 rental apartments which includes 80 units of affordable housing – as well as a 309-room Equinox Hotel.
Categories
Los Angeles Multifamily

Mom & Pop Owners Are Being Squeezed Out of the Apartment Business

Many people have the misconception that owners of Los Angeles Multifamily properties are huge, faceless corporations that will stop at nothing to squeeze tenants for every dollar. The reality is that the Los Angeles multifamily market is largely a small property owners’ market consisting primarily of ‘Mom & Pops’ who have owned and operated their properties for in many cases many decades upon decades. For many reasons, this group of small investors are sadly getting squeezed out of the business entirely. Here are a few reasons why:

Increased Government Regulation
California (and in particular Los Angeles) happens to be one of the most highly-regulated regions when it comes to the business of rental housing. State Bills and Propositions all proposed or passed in the last handful of years such as AB 3088, SB 91, AB 1482, Proposition 10, Proposition 15, Proposition 19 and now AB 854 – all have imposed stricter rent control, moratoriums on evictions, and have created an atmosphere that is largely pro-tenant at the expense of landlords.

Increased Operating Expenses
If you operate a multifamily property in the city of Los Angeles, you have almost certainly experienced a handful of expense increases over the past few years. The RecycleLA program, which created trash pick-up zones and eliminated a property owner’s choice of Trash companies caused waste bills to increase as high as 3x what they originally were. Government-imposed capital expenditures such as seismic retrofitting which can run upwards of $100,000 have forced many owners to sell their properties. Other expenditures imposed by insurance companies on their annual inspections have become all too rampant. The cost to operate for some has just become too high.

Barrier to Entry is Very High
As these smaller owners exit the real estate business, I am seeing less and less actually enter the business to replace them. Instead, smaller owners are being replaced by larger, middle-market and even institutional owners with deep pockets and ample capital to deploy. From a returns standpoint, it’s virtually impossible for a young couple nowadays to purchase a property with a 20% down payment and have that deal actually pencil. Where apartment buildings are priced with respect to their rents today, you would have to come in with a minimum 50% down payment to barely cash flow. On a $2,500,000 it is difficult for an average investor to scrape together $1,250,000 as a down payment. On many of our small listings, the buyers who show up on even a 5-unit deal own 500+ units.

All of these things are forcing ‘Mom and Pops’ to retire out of the business and they are not being replaced by younger ‘Mom and Pops.’ For better or for worse, the multifamily market is slowly but surely shifting towards more institutionalized ownership.

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Los Angeles Multifamily Renovation

Renovation Update from a Multifamily Property We Sold in Mid Los Angeles

A quick renovation update on a 6-unit property we sold last year in Mid Los Angeles.  We delivered the property to the Buyer with 4 of 6 units vacant units.  Generally speaking there are pros and cons to purchasing a rent-controlled property with vacancy such as this.  On the positive side, it allows a Purchaser to begin renovating the units immediately upon closing escrow to achieve at or above market rents without having to deal with existing tenants.  On the negative side, deals with vacancy are generally tougher to finance and many times they are priced with the juice already squeezed out of the deal.

That said the buyer of this property did a fantastic job with their renovations.  They laid down new flooring, installed new European style cabinets with Caesarstone countertops, modern tile backsplashes and stainless steel appliances – most of the attributes that today’s renter pool looks for in a unit.

They are beginning the lease up process asking just under $3,000/month for each of the 4 two-bedroom units – which is top of the market rent for the area.  Upon fully leasing the units, their plan is to refinance their current bridge loan which they used to acquire the property with permanent debt.  All in all this was a solid execution. See before and after photos below:

“Before” Photos

“After” Photos

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Los Angeles Multifamily Renovation Vacancy

Tips For Leasing Your Vacant Apartment Unit During Covid-19

Apartment vacancy is high in Los Angeles right now as a result of the effects of Covid-19.  As a result many landlords are left with vacant units that are collecting dust due to current residents moving out for various reasons which include things like exiting Los Angeles entirely, consolidating from say a 2BR unit to a 1BR unit to save money or even moving back in with their parents.

18 months ago if you had a vacancy in a prime area, you might only have had to put out a ‘For Rent’ sign and you would have applications in within a few days.  Times have changed during the global pandemic and in order to lease your vacancy, you may have to do some things that you otherwise would not have had to do.

Here are a few tips for leasing your vacant apartment unit during a period of high vacancy such as this one:

Freshen Up Your Unit – Keep in mind that you are competing with nicer buildings who also have vacancies and whose rents are likely falling as a result. Your product has to look good. I’m not saying that you need to fully renovate your vacancy but there are various low cost improvements you can make to make it look a little bit fresher such as painting the unit, putting in new blinds, reglazing the bathtub and changing out old light fixtures, kitchen and/or bathroom fixtures. These minor improvements can make a difference in terms of attracting prospects.

Take Good Photos – I can’t tell you how sad it is to search apartments.com to find tired looking units with even worse photos. The first thing the average millennial renter will do when searching for an apartment is go online and search listings. If your unit does not show well on screen, you will likely not get inquiries. You do not have to hire a professional photographer for every vacancy. The new iphones have excellent wide-angle lenses which will do just fine in terms of capturing what you need to capture.

Utilize All Online Listing Platforms Available to You – Although putting up a For-Rent sign may have been your only source of leads in the past, if you are not using online listing sites like apartments.com, Zillow, or even Craigslist, you will not get the volume of inquiries you are looking for.

Answer The Phone and Respond to Inquiries Promptly – This should go without saying but I speak to many rental prospects on the phone who are so happy to get a warm body who actually answers the call and responds to their inquiries quickly. A lot of times with renters, the first person they can get on the phone is the first place they will tour and often times the place they will lease. You should create a template response that goes out to all text and email leads which you can just copy and paste to each prospect without having to write a new one every time!

Be Realistic With Pricing and Even Offer a Concession – Let’s face it, with high vacancy comes the flattening and even decline of apartment rental rates. In some major metropolitan areas, some large apartment landlords are reporting rents being down as much as 20%. Price your unit accordingly and if you are offering say a one month concession, try to negotiate a 13-month lease.

Categories
Los Angeles Multifamily Vacancy

Apartment Vacancy Continues to Rise in Major Metropolitan Areas

If you own a multifamily property in Los Angeles, chances are that in the last 12 months (during the global pandemic), you have dealt with some component of vacancy at your property.  We expect this trend to continue at least through 2021.   

Here is why:

Why vacancy rates are expected to rise in 2021:

1. New Supply Being Delivered to Market:  More than 396,000 apartment units were delivered in 2020, a peak year for deliveries, according to Dodge Data & Analytics Supply Track. Another 506,637 are anticipated to be delivered in 2021. However, it is possible given labor and material shortages that not all of those apartments will be completed this year. The cities with the highest levels of apartment construction underway now include New York, Washington, Dallas, Houston, Los Angeles and Seattle, according to Dodge.

2. Demand is Down:  Demand, particularly for Class A apartments in prime urban locations, dropped precipitously early in the pandemic as young adults left to move in with their parents and tenants moved to the suburbs in search of more living space, less density and lower rent. Working remotely and the lack of availability of urban amenities during the pandemic meant renters were more likely to move away from expensive downtown locations. Those renters are not anticipated to return to their offices – at least not full-time – until later in 2021 or perhaps 2022.

3. Disconnect Between Demand and Supply:  While demand is expected to remain strong for Class B and Class C apartments, especially in markets with relatively steady employment, new supply is primarily Class A apartments in already saturated markets where demand is down.

4. Uneven Performance by Market: Vacancy rates also vary by market. Class A apartments in prime urban markets, particularly in gateway cities, are not expected to recover until 2022, according to market analysis by CBRE. But markets in the Midwest and South, which didn’t deteriorate as much in 2020, are anticipated to have lower vacancy rates in 2021.

5. Job Growth Won’t Replace 2020 Job Losses:  Fannie Mae’s economic forecast expects job growth of 5.5% by the end of 2021, but even that estimated 7.9 million new jobs won’t make up for the estimated 9.3 million jobs lost in 2020. Fannie Mae expects it will be 2022 before those jobs are replaced and before demand will increase substantially for apartments.

Why vacancy rates will improve in 2022

The U.S. economy will begin rebounding in 2021, particularly as vaccinations become more widespread. That rebound is anticipated to accelerate in 2022. By late 2021 and into 2022, job growth is anticipated by Moody’s Analytics to increase in Austin, Dallas and Phoenix, which should increase multifamily demand. All three cities have a significant amount of supply, but demand is strong enough to absorb that supply. Other cities where employment recovery levels by the fourth quarter of 2021 are expected to be strong include Salt Lake City, Indianapolis, Houston, Denver, Atlanta, San Antonio and Jacksonville. Cities with lower expected employment recovery include Pittsburgh, Chicago, Los Angeles, New York, Orlando, Providence, San Francisco, Cleveland, Detroit and Las Vegas.