LOS ANGELES—Cap rates are compressing, prices are up andcompetition is high, but value-add investors are still stayingextremely active in this market; however, the supply/demandimbalance in Los Angeles is also fueling majormultifamily development in markets throughout thecity. The question of value-add investors competing with newconstruction product came up during an interview aboutMWest Holdings' recent acquisition of Emerald Terrace inKoreatown. According to Joe Leon, aJLL managing director that brokered the deal,value-add is unique positioned to compete with new constructionbecause they can withstand lower rental rates and are betterpositioned to hold through a downturn.

"Because that supply is all class-A or double-A or triple-Aluxury product, the rent levels will be significantly higher thanour post renovation value-add rents," Leon tells GlobeSt.com. "Thatis really the value-add proposition. These buildings are for peoplewho want to live in that area and don't want to pay those class-Arents or just can't pay those rents. Value-add is the perfectalternative for that, because you'll still get beautiful units andamenities." According to his research team, value-add units in thatmarket have a $300 to $500 delta in rental rates compared to newconstruction product. As a result, value-add investors, most ofwhich are getting long-term, 10-year debt, are well equipped tocompete when that new product comes online.

Leon also notes the small average unit size of older, renovatedunits, as another advantage. Using the Vermont as an example, which was actually newconstruction product, he explains that the smaller unit sizebrought down the final rental rate, making it more attractive."That is when smaller units actually become an advantage," he says."We found that in the Vermont, where the average unit size is 775square feet, unlike some of the newer product that is 1,200 squarefeet, and we were more affordable. We were class-A; we werehigh-rise; we were luxury, but our rents were significantlycheaper. It is a much better value to the renter. It is the samething with Emerald Terrace. It is going to be a fully renovated andbeautiful project when they are done with it."