Small apartment buildings attract great interest from investors

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Daniel Blackwell of CBRE recently sold a 28 unit multi-family property in Long Beach.

Megaprojects and multi-million dollar multi-family sales may grab the headlines, but much of the Los Angeles real estate market is made up of small apartment buildings.

BJ Turner, founder of Beverly Hills-based Dunleer, which owns small and medium-sized apartment buildings, said about 96% of apartment buildings in Los Angeles have less than 50 units.

“LA is a really interesting apartment market because it’s incredibly fragmented,” he said.

Daniel Withers, senior vice president at Matthews Real Estate Investment Services, added that the average apartment building in Los Angeles has 16 units.

In 2020, 764 apartment buildings swapped hands in the city of Los Angeles, for a total of more than $ 3.1 billion. The average multi-family building that changes hands had 15 units and the average selling price was $ 4.1 million.

Withers said more investors are interested in small apartment buildings.

“We are seeing a significant influx of capital into the market, especially from the private capital side,” he said. “We are currently witnessing an acceleration in inflation. The stock market is a snap these days when people don’t know where it is going, so we are seeing people getting out of stocks and investing in more tangible assets. “

When the pandemic first hit, Withers said he saw sales slow. Now, however, “it’s more business as usual,” he said, adding that low interest rates are a big part of the interest now.

Dan Blackwell, executive vice president of the Capital Markets team at CBRE Group Inc., said interest in small apartment buildings is “at an all time high.”
“We have had record levels of investor interest to buy multi-family assets in Southern California,” Blackwell said.

“We have some really good things going on. These multi-family properties, these little multi-family properties, they don’t build a lot of them. They are difficult to build, ”he added. “These class B and C workforce housing properties, it’s kind of like you’re in a safe asset class because you’re buying them below replacement value; they’re not building enough to meet demand, and they’re good stable assets.

Kimberly Stepp, director of Stepp Commercial, added that despite high demand, there is not much availability.

“There is a shortage of inventory, interest rates are historically low and people want to buy now. There are a lot of buyers and not enough sellers, ”Stepp said.
Real estate experts say they are seeing new investors entering the multi-family market. Some are individuals who are building a portfolio for retirement, while others are retail and office investors who have moved into multi-family housing.

“There are more people going into multifamily than going out,” Blackwell said.

The building wants

Turner launched Dunleer in 2014, focusing on small apartment buildings of 25 units or less. Today, the company makes more acquisitions of properties of 25 to 75 units, but still owns smaller properties.

“It’s easier to surround yourself with real estate when you have a smaller apartment building,” Turner said, explaining why he started with smaller assets.

He added that the properties appeal to homeowners who are not necessarily real estate professionals due to their prices as well as the less greedy nature of building management.

Turner said many investors start their real estate portfolios by purchasing buildings of around eight units and using the cash flow to buy more properties.

Henry Manoucheri, president and CEO of Century City-based Universe Holdings Development Co., said that while the company purchases many larger assets, it is also interested in small properties in markets where the company is already established.

For smaller properties, Manoucheri said, Universe Holdings is looking for a “unique property in a great location where there is a substantial advantage.”

This often comes from historical landmarks and generational sellers where the family has owned a property for 40 or 50 years.

“In those markets where we have other larger properties, we can absorb other smaller buildings and manage them within our portfolio. It has to be close to where we have other properties, ”Manoucheri said.

The company recently began to expand outside of California, making its first acquisition in New Jersey. Manoucheri said he was interested in larger properties in the new markets the company is entering.

“It’s much easier to control costs and buy a bigger complex,” he said.

Blackwell said that when it comes to small multi-family properties, most investors have something specific in mind.

“What most investors are looking for is generally long-term value-added investing where you can make cosmetic added value, maybe take ownership from a C to a B over time.” , Blackwell said.

Withers agreed.

“These are the fundamentals of all types of products. This is the determined location. And they would like to see an increase in rents and have a value added component. But location is the driving force right now, ”he said.

Some buyers are also looking to improve asset performance by replacing inefficient management with better operators, whether the company manages the building itself or uses third-party managers.

Another way to improve a building’s performance, experts say, is to add things like secondary suites, which more and more buyers are adding to their properties as they provide additional rental units.

“Any property that has the capacity of an ADU is also a selling point and a hot spot for buyers,” Stepp said.

Blackwell added that it is cheaper to build ADUs than to buy more units, thus increasing the attractiveness of properties with this capability.

He also noted a great interest in stabilized assets.

“A stabilized asset is very popular right now. Blackwell said. “You can come in as an investor and not do a lot of heavy work. We now have more rent control than ever before, and the cost of materials is on the rise. “

Uncertainty of the tax code

Experts expect demand for multi-family assets to remain high, but they said there was a potential complication: a lack of knowledge about potential tax code changes.
The possible changes to 1031 exchanges are a priority for many. In a 1031 exchange, sellers avoid paying capital gains taxes by reinvesting the proceeds of the sale within a set time frame or vice versa in a reverse exchange.

Withers said: “There is still a lot of uncertainty about what will happen in the market … as we get a clearer picture, deals are going to increase.”

Stepp said some owners have become concerned about the potential changes to 1031 exchanges as a result.

“They’re worried that if they don’t act now, they might not have a chance to make 1031 trades. Some of the inventory in the market is now like this, ”she said. “Some pros, some people who have been in the business for a while, sell their wallets and move their money to the Red States, especially in exchanges right now or in different types of products.”

Stepp called it a “fear-based sale” and added that some “are asking crazy prices.”
Blackwell said concerns over tax code changes had “pushed a lot of decisions forward”
make property. There may now be owners who make the decision to sell and who plan to sell 12 or 24 months later. “

He added that because the market is so hot right now, sellers are also more motivated.

Experts predict that small multi-family buildings will remain in demand.

“As long as inventory stays low, prices are going to stay high,” Stepp said. “This is what we are seeing. It’s not slowed down at all.

Universal de Manoucheri always targets small working people in the future.

“We will continue to run a two-pronged type of operation: one side of the business focuses on small transactions and tries to buy a lot of them, and the second side focuses on larger assets,” he said. -he declares.

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