The pandemic aside, multifamily investors have been strategically exiting the West Coast region in favor of growth markets in the Sunbelt. However, it is likely too soon to write-off the region altogether, which continues to suffer from a tremendous housing shortage, according to Edward Ring of New Standard Equities.
There are a myriad of reasons why investors have chosen to flee the West Coast, despite the fact that is continues to house some of the most dense metropolitans in the country. "For the last four years or so, the political climate in the west has turned off many investors," Ring, the CEO at New Standard Equities, tells GlobeSt.com. "Rent control, tenant friendly eviction regulations and, in the last two years, onerous COVID-19 rules that were perhaps designed with good intentions have created a lot of unintended consequences that most certainly have negatively impacted housing providers. Many investors are somewhat spooked."
While there is a clear capital trend out of California, Ring believes that is a mistake. "In California, greater Portland and greater Seattle, there is a tremendous shortage of housing and available housing stock largely doesn't meet the demand," he explains. "Further, that demand is coming from a highly educated workforce, a large segment of whom are working in global-leading tech and biotech industries, or are employed in jobs that support those industries."
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That is enough, in many ways, to offset the challenges of investing in the region, which isn't known for its business-friendly policies. "Investors may not love the sometimes-over-reaching political environment, but ultimately the fundamentals in the West truly do favor multifamily investment," says Ring. "Over the long haul, we've all done quite well in navigating the region."
The West Coast is notoriously a high-barrier-to-entry market, and the price tag on investments continues to climb. However, Ring notes that "stable employment, very limited available land and extremely challenging environmental laws, along with higher building costs truly create a long-standing imbalance between supply and demand." These are not necessarily social positives, but investors will see rising cash flow as a result of this dynamic.
Outward migration patterns, particularly from California, made major headlines and drove a narrative that people are leaving the region in droves. Ring says that the current outflow isn't a cause for concern." While headline news likes to point to folks moving to other parts of the country, the out-migration would have to be much bigger to have a material impact.," he says. "If California, the world's fifth or sixth largest economy did suffer seriously meaningful out-migration, I would assume that would have a devastating effect on the rest of the US. It would take a long time for this economy to be replaced."
For these reasons, Ring will remain a net buyer in the West Coast markets over the next 12 to 24 months. He does have some concerns. For starters, he says that pricing has yet to adjust to short-term debt markets, and elevated borrowing costs are still not reflected in cap rates. But, he still bullish on the market. "We can still borrow at very low rates," he says, "and with the west still recovering from COVID regulatory overreach, I believe our investments today will bear fruit over the long run."
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Kelsi Maree Borland
