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.

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"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.

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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."

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However, Leon also says that it might not be a matter ofcompetition. Los Angeles has such a shortage of housing and a highdemand, he believes that both value-add investors and developerswon't have problems with occupancy. "I think on the big pictureside, with occupancies at 97% and 98% in general in Los Angeles, wecan handle the supply," says Leon. "The demand is there and thejobs are there. A property like this is going to be perfectlypositioned, and yet we are still a value. Most of the buyers areputting on seven to ten year debt, and it is so favorable and soinexpensive that we probably want to go longer term because we areonly going to go up from here. That also allows you to weather acycle because you don't have any debt coming due. The class-Aproperties might get hurt when you have that much supply comingonline. Value-add will be the product that will fair very wellbecause it is more affordable."

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Kelsi Maree Borland

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more.