Getting Deals Done in a Low-Transaction Climate

Kimberly Stepp

The high cost of financing single-family homes, barriers to entry for new residential product, and overall limited supply of housing in Los Angeles have all contributed to the outsized renter demand for multifamily properties. At the same time, rising interest rates, inflation, and the regulatory environment have negatively impacted investor appetites for apartment assets in the region. Pricing expectations between buyers and sellers are often too far apart and many owners are now choosing a wait-and-see approach if they don’t have to sell their asset in the immediate future. As a result of these challenges, sale velocity is down in most areas of Los Angeles.

Opportunities are still out there, however, and long-term thinking is the way to strategically transact. More creative deal-making is certainly required to get transactions done, and sellers more often than not have to change their price expectations.

Following are five of the top trends I am currently seeing in the L.A. market that are beneficial for both investors and owners:

Cash is king

Cash is king in today’s market. Bypassing financing, if at all possible, creates a winning situation for both the seller and the buyer. While this is a challenge for some, there has been a significant amount of equity waiting on the sidelines. Investors can look to recapitalize the asset at a later date once rates decrease.

1031 exchanges out of state

If a seller can exit their asset at a low cap rate and trade into a higher cap rate asset, it often makes sense to participate in a 1031 exchange. Sellers trading out of state are able to expand their options this way, and often seek to capture a less management-intensive property, own in a landlord-friendly environment, and enjoy higher returns on their investment.

Is it walkable?

Walkable assets are in demand in Los Angeles. Renters now more than ever before have a heightened desire for walkability that is prevalent in urban environments. Neighborhoods that provide access to amenities such as restaurants, entertainment venues and shops, as well as transit options provide investors with the opportunity to experience higher rents and occupancy and sellers can capture premium pricing.

Value-add is still hot

Value-add opportunities are also attractive with well-located assets. Acquiring a high vacancy asset or the ability to buy out rent control tenants in order to secure market rents are also effective strategies to adding value. That strategy, combined with a renovation to attract higher rents, ultimately elevates the cap rate and creates cash-flowing assets.

New buyers in the market

Over recent quarters I have been seeing an influx of one-off investors coming into the market that are looking to diversify their portfolios by owning tangible assets. Again, for long-term thinking, L.A. area assets are poised to experience rent growth and are seen as a solid, less risky alternative to the stock market.

Ultimately, the L.A. apartment market is anticipated to pick up momentum through the end of next year as sellers adjust to pricing expectations and buyers consider long-term appreciation schedules as they show positive valuations and rent rate gains over time.

Kimberly Stepp is principal, Stepp Commercial Group.