Southern California multifamily investors are actively buying through the pandemic, but business plans look a little different. Value-add investors in particular are challenged to turn short-term deals around for a profit in the current market. However, investors with long-term outlooks are still moving forward on deals.
“If you are looking for a quick value-add opportunity to reposition assets for a quick profit, this business model will be tough to implement in today’s marketplace. I see value-add buyers being put on the sideline for the time being, but as Californians get back to work and eviction moratoriums are removed, the value-add business will come back,” Daniel Withers, SVP and senior director at Matthews Real Estate Investment Services, tells GlobeSt.com.
If history is a window into the future, apartments in Southern California will not only survive the recession but will see a surge of growth during the recovery. This precedent is fueling investment activity in the region. “California multifamily properties have historically outperformed the national average, and I continue to see this moving forward,” says Withers. “Which is why I believe if you are an investor who is in it for the long haul, you will do just fine.”
Investors aren’t only adjusting strategy but underwriting as well. Specifically, investors are underwriting increased concessions. “Concessions were nonexistent in the marketplace before the COVID-19 pandemic but will be a key component in driving tenant activity, says Withers. “We see operators offer 1-3 months of free rent and waive an array of fees that they would have previously charged, such as pet deposits, parking fees, and key/removal charges.”
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Increased concessions will put downward pressure on revenue and net operating income. To secure a debt on a deal, investors will need to increase capital reserves to compensate for this decrease in revenue. “When going out to the capital market, operators should anticipate increasing reserves in both purchasing and refinancing,” says Withers. “Lenders now require 6-18 months with debt service reserves for lenders to proceed. We suspect that the higher-than-normal increase in debt service reserves will remain for the entire 2021 and perhaps even into 2022.”