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CAP Rates for Apartment/Multifamily Properties in Los Angeles California

Multifamily Apartment Cap Rates
Rates as of: 12/08/2021
Description Cap Rate
Luxury Metro A Class 4.15
Luxury Metro B Class 4.28
Luxury Metro C Class 4.75
Suburban A Class 4.54
Suburban B Class 4.46
Suburban C Class 4.90
Value Added Acquisition 5.50

Multifamily Apartment Cap Rates

About Multifamily Apartment Cap Rates Today

By Terry Painter/Mortgage Banker 

Author of: “The Encyclopedia of Commercial Real Estate Advice

Member of the Forbes Real Estate Council

 

Third Quarter 2021 Cap Rates

Over the past year, multifamily cap rates in all asset classes fell by an average of 54 bps which on a million-dollar purchase equals an increase in value of $54,000. Not small potatoes. Suburban C Class properties experienced the largest cap rate decline by 76 bps or an increase of $76,000 for a million-dollar property. For the first time, quality Class C properties in good neighborhoods are selling for just about the same cap rate as Class B properties. This just doesn’t make sense when you consider the increased cost for repairs and maintenance with an older Class C property. Value-added properties dropped by an average of 60 bps, which makes it much riskier to reposition or rehab these (See more about this below)

5 Reasons Why Multifamily Apartment Cap Rates are so Low

In 2008 when the Great Recession hit, multifamily property values went down or remained flat. The recession was caused by a 6 year bull market where commercial real estate prices kept going up reaching unrealistically high prices that were not supported by reality. The real estate market was also in the hyper-supply phase (see more about this below), which usually means you are buying at the top of the market. Today we are at a similar place, with multifamily prices at an all-time high as a result of inventory for apartment buildings for sale being at an all-time low. This is thought to be a result of the Coronavirus Recession, which unlike the Great Recession which was caused by a runaway subprime loan market.

 

Conversely, multifamily apartment properties in this recession have been going up in value pushing cap rates way down. Why has this happened?  First, this started with residential property values skyrocketing and many multifamily sellers waiting for prices to go up substantially before they put theirs up for sale. Secondly, it is thought to be due to an increased need for housing with vacancies averaging just below 3%, and rents rising at over 8% which theoretically should push prices up. Thirdly, because of the stress the coronavirus put on the economy, almost all apartment starts were either delayed or canceled. Fourthly, to compound this further, banks tightened underwriting and are still shy about lending on new commercial construction today due to the uncertainty of market rents, rental concessions, rental collections, and the time for absorption.  A fifth factor is that multifamily properties are without doubt the most popular type of commercial property and are even more in demand. Lastly, with the stock market continuing to go up, many investors fear the bubble is about to burst and preferred to diversify into investing in overpriced multifamily properties, confident that rents and property values will go up in the future.

Are you Buying at the Top of the Market?

So how do you know if you are buying at the top of the market? Supply and demand is the largest control factor on prices. If there are very few properties for sale in the property class and neighborhood you are shopping in, and almost no new construction starts, this is a sign you are purchasing at the top of the market. It is essential to look at the relationship between low cap rates, low net operating income, and how much time it might take you to raise rents and realize the return on your investment.                                                                                                                                  

 

Most buyers are indeed paying too much for commercial properties when cap rates are historically low, rationalizing that rents can be raised over time. But how much time are we talking about? If it is going to take more than a year for you to reach the cash on cash return you want by raising rents, you are likely paying too much for the property. Now that unemployment and GDP are beginning to return to normal, there will be more apartment construction starts which should eventually supply more units in the market than demand. This will be a much better time to buy.

 

But if you absolutely have to purchase an apartment property now that has an unattractively low cap rate because you have a 1031 exchange, or cash just sitting there, it is important to ask yourself these two questions: 1.) With such a low return on your cash investment, is it worth it to wait until you can increase rents and eventually increase net operating income and property value? Right now, as in most recessions, rents are flat. This means it could take 2 years or longer for rents to increase enough for you to get decent cash on cash return. 2.) To mitigate this, does the property already have under-market rents, or offer some low-cost operational and/or cosmetic value adds that will allow you to increase rents within a year? These could include lowering expenses – perhaps managing the property yourself, and adding new paint, floor coverings appliances, and fixtures.

 

Here is my Forbes.com article on this subject: https://www.forbes.com/sites/forbesrealestatecouncil/2021/04/06/are-you-buying-at-the-top-of-the-real-estate-market/?sh=4b37ff503230

Is it Safe to Rehab a Multifamily Property Today?   

With Cap Rates for Multifamily Apartment properties holding at historical lows, value Add Acquisitions are priced at an all-time high averaging a 5.5 cap. This is what a quality C Class property went for just over a year ago, so be wary of overpaying for a property that needs major repositioning or rehab. Unless you can buy it at a very good price per unit, this is not the best time to go this route. With the uncertainty of actual repositioning expenses, future market rents, new construction starts, rental concessions, and absorption times, this can represent a large risk.  Historically, value-added investment real estate made sense only when buying at below market value. As a mortgage banker that has made loans on rehab projects since 1997, the largest risk I see today is overpaying for a building and then going over your rehab construction budget. And then compounding the problem taking too much time to complete the construction. 

 

In the first chapter of my book, “The Encyclopedia of Commercial Real Estate Advice” I discuss the four phases of the real estate market cycle and the best time to buy. The market cycle causes there to be winners and losers. Winners are the sellers that sell at the top of the market. Losers are buyers who buy at the top of the market.

 

The end of the recession phase, when distressed commercial properties are foreclosed on is a good time to buy. This is followed by the recovery phase when unemployment has gone down and GDP has gone up—this is a great time to buy. Then comes the expansion phase – the beginning of which is still a good time to buy.  But because it is now a seller's market, prices are going up again. Next comes the hyper-supply phase which is the worse time to buy. Prices are just too high, cap rates are insanely low, but there is an oversupply of units on the market due to new apartment building starts and completed rehab projects. It’s unbelievable that investors are still paying too much for properties – sure that prices will go even higher. You won’t know when the next phase of the real estate market cycle will start, but you can learn to identify which phase you are in so you can make intelligent decisions on purchasing and selling.  

 

 

 

 

DON’T FALL INTO THE CAP RATE TRAP

“Are you kidding me?” my client asked.  “You’re telling me that the property taxes are going up by $19,500 when the county reassess the property I’m buying based on the purchase price after I own it?”

“Yes”, I answered.  “In California they do that.” 

“Well then”, he said, “ that means I’m buying the property for a 4.70 cap instead of the 6 cap the listing agent said it was. That means I’m getting ripped off and the listing agent lied to me. Why would he put the seller’s lower property taxes in the list of expenses and calculate a 6 cap? This is the only property I’ve identified in my 1031 exchange.  What am I going to do?”     READ MORE

About the Los Angeles, California Real Estate Market in 2021

Apartment loans in Los Angeles. Apartment loan rates, multifamily

About the Hot Los Angeles Rental Market

­­­­­­­­­­­­­­­­­In the city of Los Angeles, California,  the house value median has increased to $677,400 in 2018. Los Angeles home values are on a steep rise – a gain of 8.7 percent in the last year. And there is a prediction that they will increase a whopping 12.1 percent in the following year. It is very unlikely to happen, but if the rate of this 2 year period were to continue for 7 years, real estate prices would about double.

This is a ridiculously high increase making housing less and less affordable. It also makes it more financially difficult to convert from renting a dwelling to purchasing a home.

Getting in the real estate market now for many people is like the race track dogs who chase the mechanical lure they never catch. It smells so delicious, but they can’t put their mouth around it.

It takes an aggressive savings plan to get into the housing market. Desire, strong will, and hard work are key ingredients to make it happen.

$508 is the list cost median per square foot in Los Angeles. The metro area of Los Angeles-Long Beach-Anaheim has a lower list cost median per square foot of $433.

$799,999 is the presently listed cost median of houses in Los Angeles. $699,900 is the cost median of houses that have been sold.

Rent costs are exceedingly high in Los Angeles and the Los Angeles-Long Beach-Anaheim Metro area. $3,550 is the rent cost median in the city of Los Angeles. The metro area of Los Angeles-Long Beach-Anaheim has a lower rent cost median which is $3,200.

These high rent prices are leveling off now because they are out of the affordability range of many people. This can give some relief to renters.

The rate of foreclosures is an important economic factor when it comes to real estate. A high foreclosure rate yields a lower real estate value for any particular location.

For every 10,000 houses in Los Angeles, 1.0 houses go through foreclosure. The metro area of Los Angeles-Long Beach-Anaheim has a lower foreclosure rate of 0.9. 1.6 is the foreclosure rate of the United States.

When home owners experience the following condition, they could very well be on the way to foreclosure. And that condition is called mortgage delinquency. What is mortgage delinquency? It is the condition of a home owner not making good on one or more mortgage payments on their home.

The value of houses dropped more than 20 percent in the United States as a result of the recession of 2008. This recession had such a negative effect on the value of homes that many homeowners are still underwater regarding their home mortgages. Being underwater on a mortgage has the meaning of the homeowner having a bigger mortgage debt than the value of their house.

5.4 percent of homeowners in Los Angeles are experiencing being underwater regarding their mortgages. The metro area of Los Angeles-Long Beach-Anaheim has a higher percentage of owners of houses being underwater on their mortgages, which is 5.6 percent.

Moving onto commercial real estate. There is a shortage of senior housing in Los Angeles, and this shortage is compounded by the lack of senior housing being located near public transportation. So many seniors need to be able to enjoy the freedom of traveling to many different locations. Movement is life.

Well, one Los Angeles project which will help meet this need is a development for senior housing of 70 units located next to Crenshaw/Slauson Station in Park Mesa Heights. This station is currently under construction. It is called the Curve senior housing project.

This development for seniors is to be a 52,777 square foot five-story building. What a gift it will be for the occupants – There will be 40 units for low-income seniors, and 29 units for very-low-income seniors. The remaining unit will be for the manager who will receive the unit at market rate.

The architecture is very interesting. It’s in the Art Deco style of the 1930s and 1940s – similar to the buildings of Crenshaw Corridor of the past.

In the area of this development, gentrification is taking place and housing is less and less available for those who live in the neighborhood and want to stay. When they get to retirement age, they face a serious shortage of senior housing in the area.

California is in the top 5 markets for those who want to invest in senior housing. There are a huge number of baby boomers retiring, and there are big challenges like the huge land costs, and the huge labor cost. There are now 1.5 million seniors in Los Angeles. By 2030 the retirement population is estimated to double to 3.0 million. And these retirement communities need to be near public transportation.

This current project, the Curve senior housing project will help give quality of life to some seniors as well as affordable housing.

The annual median household income in the city of Los Angeles is $55,909.

If you want a great source for learning about multifamily complexes to purchase in LA, click on https://www.theapartmentconsultant.com/

Apartment Loan Store is proud to serve the entire Greater Los Angeles area:

  • Calabasas
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  • Moorpark

U.S. National-Level CAP Rates and Expected Rates of Return by Property Type, Sector, Class and/or Segment

   

Stabilized Property Acquisitions

Value-Add Property Acquisitions

   
CAP Rate
 
AD Over 10-Yr Treasury
Expected Return on Cost 
 
AD Over 10-Yr  Treasury
Property Type
​Sector
Class/
Segment
H1 2017
(%)
H2 2017
(%)
Change
(bps)
H1 2017 (%)
EOP 1.49
H2 2017 (%)
EOP 2.45
H1 2017
(%)
H2 2017
(%)
Change
(bps)
H1 2017(%)
EOP 1.49
H@ 2017 (%)
EOP 2.45
Office
CBD
ALL 6.61 6.63 2 512 418 8.22 8.24 2 673 579
AA 5.19 5.24 5 370 279 - - - - -
A 5.95 5.99 4 446 354 7.12 7.10 -2 563 465
B 6.85 6.84 -1 536 439 8.02 8.03 2 653 558
C 8.61 8.64 3 712 619 9.83 9.8 6 834 744
Office
Suburban
ALL 7.64 7.76 11 615 531 9.21 9.33 11 772 688
AA 6.20 6.31 11 471 386 - - - - -
A 6.96 7.07 11 547 462 8.06 8.18 12 657 573
B 7.97 8.13 16 648 568 9.20 9.27 7 771 682
C 9.30 9.46 16 781 701 10.45 10.60 15 896 815
 
Industrial
ALL
ALL 6.72 6,73 1 523 428 7.71 7.74 3 622 573
A 5.48 5.54 5 399 309 6.34 6.41 8 485 396
B 6.59 6.52 -7 510 407 7.53 7.53 0 604 508
C 8.13 8.16 4 644 571 9.31 9.33 3 782 688
 
Retail 
Neighborhood
Community
ALL 6.94 7.12 18 545 467 7.92 8.14 22 643 569
A 5.62 5.66 4 413 321 6.59 6.85 26 510 440
B 6.83 7.03 20 534 458 7.81 8.00 19 632 555
C 8.39 8.68 29 690 623 9.36 9.58 22 787 713
Retail
Power
ALL 7.36 7.54 18 587 509 8.25 8.47 22 676 602
A 6.11 6.16 5 462 371 7.21 7.31 10 572 486
B 7.30 7.47 16 581 502 8.06 8.40 34 657 595
C 8.70 9.03 33 721 658 9.52 9.74 22 803 729
Retail
High Street
                     
A 4.23 4.37 13 274 192 - - - - -
                     
 
Multifamily
Infill
ALL 5.26 5.32 6 377 287 5.95 6.03 8 446 358
A 4.60 4.67 8 311 222 5.34 5.41 7 385 296
B 5.15 5.20 5 366 275 5.78 5.87 9 429 342
C 6.06 6.12 6 457 367 6.75 6.81 7 526 436
Multifamily
Suburban
ALL 5.67 5.74 7 418 329 6.33 6.45 11 484 400
A 5.01 5.10 10 352 265 5.62 5.71 9 413 326
B 5.53 5.61 8 404 316 6.16 6.26 10 467 381
C 6.48 6.50 2 499 405 7.22 7.37 15 573 492
 
Hotels
CBD
ALL 7.85 7.91 6 636 546 - - - - -
LUXURY 6.83 6.92 8 534 447 - - - - -
FULL SERVICE 7.55 7.62 8 606 517 - - - - -
SELECT SERVICE 7.94 8.01 8 645 556 - - - - -
ECONOMY 9.10 9.11 1 761 666 - - - - -
Hotels
Suburban
ALL 8.39 8.44 5 690 599 - - - - -
LUXURY 7.42 7.50 7 593 505 - - - - -
FULL SERVICE 8.07 8.14 7 658 569 - - - - -
SELECT SERVICE 8.46 8.53 7 697 608 - - - - -
ECONOMY 9.59 9.58 -1 810 713 - - - - -

 

 

 

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