From left: California Governor Gavin Newsom, Governor of New York Andrew Cuomo, and California Assembly Member David Chiu (Credit: Getty Images, iStock, and Wikipedia)
With a little more than 48 hours before the clock ran out, three of New York’s most powerful landlords made a desperate, last-ditch phone call to Gov. Andrew Cuomo. By that point, the real estate industry had already spent millions of dollars, hired seasoned lobbyists and launched media campaigns in an effort to eliminate the threat of historic tenant protections on 1 million apartments. Cuomo declined to kill the bill, and landlords across the state say billions of dollars in investment were wiped out overnight.
But across the country in Sacramento, a curious thing happened. The legislature on Wednesday passed AB-1482, a statewide rent control measure that will affect an estimated 8 million people, and top industry trade groups barely made a peep.
The California Apartment Association, which represents the owners of around 65,000 rental units in the Greater L.A. area, dropped opposition to the current form of the bill after negotiating to extend an exemption to units older than 15 years (lawmakers first proposed a 10-year limit), limiting vacancy decontrol, and restricting municipalities from instituting rent caps lower than the cap in AB-1482.
The CAA, which has pushed the state to loosen development restrictions in favor of denser residential development, declined to answer questions about AB-1482, which in most cases will limit rent increases to 5 percent plus inflation. “CPI plus five percent is causing most people to breathe a sigh of relief, we can live with that,” said Dean Zander, an executive vice president and multifamily specialist at CBRE. “It’s not unfair, it’s not gouging, and I don’t see it affecting sales or values at all.” Zander believes the measure could spark even more investment in the state because it provides some certainty to investors. “There’s no fear of the unknown,” he said. “We have a super strong market in California and knowing that 1482 passed, we know what to expect and we can underwrite for that.” READ MORE
Southern California cap rates are among the lowest in the country. According to a new report from CBRE analyzing cap rates, the greater Los Angeles market and Orange County both ranked among the top 10 tier one markets for lowest cap rates in the US. Year-over-year, cap rates compressed across asset class types, but multifamily, which has already experienced substantial cap rate compression, pricing increased only 10%, the lowest of all asset classes in the two markets. Still, cap rates are continuing to trend down, a good sign of investment perspective in the greater Los Angeles area.
“There is an almost insatiable demand for apartment properties and a relative lack of new product is continuing to drive multifamily cap rates down,” Dean Zander, EVP at CBRE, tells GlobeSt.com. “The continued abundance and influx of capital has been one of the primary drivers in suppressing cap rates in Orange County and Greater Los Angeles. Additionally, debt pricing is still very attractive to investors. Other than certain pockets in the urban CORE, we are not seeing a lot of new construction in the pipeline in either markets, which makes the existing stock of product even more enticing to investors. Steady rent growth, helped by the continued increase in jobs and migration to both Los Angeles and Orange County has also been playing a significant factor in keeping cap rates low. Lastly, single-family homes are very expensive in these markets, which in turn begets a significant amount of the population to remain renters.”
While the low cap rates are a good sign that investors continue to be bullish on the greater L.A. area, they also come with some challenges for investors. “Underwriting has become much tighter in the low cap rate environment we are seeing in Los Angeles and Orange County,” says Zander. “Investors are favoring the stronger locations, and the assumptions that buyers are more laser-focused than ever on quality of multifamily assets. We have seen the slowing of deal volume, but this is less about a lack of demand but more due to the reluctance of owners to sell as operations are so strong.”
As a result, suburban product is outpacing urban infill product. Investors are finding slightly better pricing and better returns in suburban markets. “There is more value-add potential in suburban areas, as new construction is limited. Investors are also learning that not all renters are millennials who want to live downtown,” explains Zander. “There is still a substantial number of renters in both Los Angeles and Orange County who value being part of suburban neighborhoods that are near good schools. Lastly, most of the new supply we are currently seeing is in urban markets, which are beginning to see concessions, something we are not seeing in suburban markets.”
Zander expects cap rates are going to continue to compress, particularly as the cycle continues to mature. “I do believe there is more room for cap rate compression,” he says. “As investors flock to the safety of multifamily versus other investment opportunities, prices are likely to continue to climb.”
New York-based Dalan Management acquired The Vue Apartment Homes in San Bernardino, CA for $37.4 million. The 197-unit multifamily community was sold by Irvine, CA-based FPA Multifamily.
Located at 1660 W. Kendall Dr., the property was originally built in 1988 and features five different floor plans that range from 800 to 1,030 square feet. Amenities include a pool, sundeck, business & student center, volleyball court, playground, fitness center, package receiving system and intercom-controlled entrance.
CBRE’s Stewart Weston, Dean Zander and John Montakab represented the seller.
A joint venture between IDEAL Capital Group and Aegon Real Assets US closed on a major multifamily buy in Oceanside, paying $66.25 mil for Sunterra Apartments, a 240-unit ($276k/unit) asset located at 3851 Sherbourne Dr.
Sunterra is just a mile from Vista Way, the retail corridor for residents of Oceanside. The property is centrally located and in commuting distance to Camp Pendleton, Genentech Pharmaceuticals, UC San Diego, Coca-Cola, Legoland, and the Tri Cities Medical Center.
CBRE’s Dean Zander, Stewart Weston, John Montakab, and Kevin Mulhern represented the seller, a private investment group.