Low Inventory Is Driving Investment Volumes Down
Investment volumes trended down again this year, but it isn’t due to a lack of investor demand.
“Investment volumes were down through 2019 in Los Angeles and Southern California, and that doesn’t have anything to do with appetite for investment,” Mike Longo, SVP at CBRE, tells GlobeSt.com. “There is more private equity buying power than there have ever been—we are up to $240 billion from the private equity markets—and that is just one small segment of the buying field. Low investment volumes don’t really have anything to do with the health of the market in Southern California.”
The low sales volumes are directly connected to the availability of product, but many owners are not willing to part with their properties. “It is really more of an indication of the product that is available,” says Longo. “It is hard to be a buyer in today’s market. When you see more volatility in the market, you see more transaction volume because investors are looking to monetize before any type of blips in the cycle. That is the main indicator of why we haven’t seen investors more willing to sell.”
In Los Angeles, investment opportunities are particularly slim. “There is a lot of investor focus on the Los Angeles submarket,” says Longo. “Los Angeles is the number one target market for institutional capital if you own property in L.A., you are not selling it; you are looking for more. Los Angeles is still perceived to be in an early phase of a new run, especially in the Westside and in pockets like Culver City and El Segundo. Investors are bullish that is going to continue for the next year.”
The challenge in Los Angeles is tied to its urban sprawl, which leaves a lot of territory in areas considered more suburban than urban. “The majority of our actual inventory is suburban, and a lot of institutional investors won’t push out beyond those primary boundaries,” says Longo. “When you look at the inventory within those primary markets, so much of it has already traded. Some of it has traded twice or even three times this cycle, and that means that a lot of these buildings aren’t available anymore. It isn’t because of a lack of appetite but rather a lack of availability.”
While buyers are facing challenges, borrowers are not. The healthy lending markets have helped to fuel demand. “The debt markets are also as strong as they have ever been. It is hard to be a buyer, but it is much easier to be a lender and a borrower,” says Longo. “Debt is cheap and it is continue to track downward, and lenders have gotten aggressive in how they are pricing. If you can refinance and you can get better terms, and if you still feel bullish on the market, you are generally not going to sell.”