Investment Activity Up for First Half of Year
Southern California investment activity was robust in the first half of 2018 with multifamily and industrial asset classes leading.
“Southern California is the largest most dynamic market on the West Coast, and there doesn’t seem to be any slow down in the appetite from investors,” Mike Kendall, executive managing director at Colliers International, tells GlobeSt.com. “It has been exceptionally robust, and the only thing that is limiting increases in investment volume. There is still not enough product being sold to satisfy the demand.”
Multifamily has been the most active investment class this year. In addition to the strong fundamentals and healthy demand, there is also a significant housing shortage in Southern California. “There is not enough housing in Southern California for the population and there are challenges to building more, and there are also challenges to ownership,” says Kendall. “That is benefitting the multifamily market. On the industrial side, we have never seen vacancy rates as low as they are and demand is very high from the occupier standpoint. In the coastal market, there are high barriers to entry, so we don’t see a problem on the horizon from an oversupply standpoint, although you may see that happening in some of the interior markets, like Dallas, where the barriers to entry aren’t as high.”
The activity is expected to continue through 2019, even despite increasing interest rates. Kendall says that industrial—the other most popular investment asset class—is not reliant on debt, and therefore less susceptible to interest rate increases. “In the last two years, I have had debt put on 10% of my sales, and 90% of the sales are all-cash,” he says. “There is so much institutional investment capital, and investors don’t want to dilute it by putting debt on it. They want to get as much as the capital invested as they can. Second, the transaction size on the individual property is smaller than it is on office or multifamily.”
Interest rates have jumped several times this year, but there has yet to be an impact on investment activity for multifamily and industrial. “We haven’t yet seen a major impact in volume of transactions or pricing because of the rise in interest rates,” says Kendall, adding that office has seen a slow down in activity. “Suburban office is highly dependent on debt for each transaction, and the debt now is getting more and more expensive, and that is diluting the return,” he adds
In fact, there is so much appetite for deals, investors are expanding into secondary West Coast markets, like Phoenix. “Demand is still very deep and strong in primary markets, and it is now expanding into secondary markets,” explains Kendall. “We have definitely seen significant cap rate compression in strong secondary markets over the last 12 months that we haven’t seen before. There aren’t enough opportunities for all of the capital that wants to be here. There are some buyers that are being prices out of Los Angeles, and they are going to the secondary markets, but they are being replaced by new entrance into the market. For example, there has been an uptick in global investor activity.”