Multifamily Deal Volume Drops

Multifamily deal volume is dropping. Year-over-year, deal volume is down nationally, and in L.A., that has translated into a 20% decrease in deal volume. Interest rates could be the cause of the slowdown as well as uncertainty about the length of the cycle. To find out more about the multifamily market today and an outlook for what is to come, we sat down with Mark Ventre, VP at Stepp Commercial. Ventre recently joined the firm from Berkadia, where he served as director. Here, he gives us his insider take on the multifamily market.

GlobeSt.com: Overall, how does the apartment sector in L.A. County look right now?

Mark Ventre: Deal volume has been down nationwide over the past 12 months, and while the greater LA area hasn't taken as much of a hit as other markets, it is still off by around 20% from a year ago.  This is likely due to a 75-basis point increase in interest rates since December 2016, which has caused some investors to press pause.  There is also a tendency to circle the wagons when there is uncertainty, such as the ambiguity surrounding the new administration and its ability to proceed with its campaign agenda. Interestingly, prices have not come off their highs, and continue to break records despite the increase in rates.  Reasons for this are scarcity of inventory, an incredible amount of equity chasing a relatively few deals, and an increasing amount of debt funds that are making the capital markets more competitive.

GlobeSt.com: How do the next six to 12 months look like in terms of the availability of inventory for small- to mid-sized assets?

Ventre: The Fed's decision to end its Quantitative Easement program will force Treasury yields to increase, which in turn will cause interest rates to rise.  For many small- to mid-size apartment owners who have been contemplating selling, continued rate increases may be the catalyst they need to start unloading assets. As a result, we anticipate a modest sell-off over the next 12 months or so.  Furthermore, as the deadlines for soft-story retrofitting creep closer for the City of Los Angeles, many owners of the 13,500 properties with this issue will decide to sell to avoid the high retrofitting costs.

GlobeSt.com: What in your opinion are LA's top apartment markets for investment currently and why?

Ventre: Those seeking to add value/reposition see the enormous rent disparity between newer class A and B buildings versus older class C assets.  I especially like these older buildings because even when they are fully renovated, the rents still draft considerably under the newer product making them more affordable and attractive to renters.  Areas that offer the most value in renovating these buildings are in key markets like Hollywood, Koreatown, North Hollywood, and Palms/Mar Vista, as well as emerging markets like MacArthur Park, Boyle Heights, Van Nuys and Westchester.  The non-rent controlled suburbs have also seen considerable momentum in recent years, including Long Beach, Bellflower, Downey and Whittier, as well as cities close to the new football stadium such as Inglewood, Hawthorne, Gardena and Torrance.

GlobeStcom: Are 1031 exchanges happening more or less and what are investors trading into?

Ventre: The single-tenant NNN retail property market has seen an uptick in cap rates as more of these assets flood the market.  We are reaching a point in the cycle where it makes sense to exchange an apartment building at a 3.5% cap into a 5.5% or even a 6.5%+ cap deal for a national credit tenant with a long-term corporate guarantee or proven franchisee lease. These are especially popular for long-term apartment owners with below-market rents looking to sell their apartment at peak pricing and enjoy greater cash flow, a step up in basis, and a new depreciation schedule for tax shelter.

Multifamily deal volume is dropping. Year-over-year, deal volume is down nationally, and in L.A., that has translated into a 20% decrease in deal volume. Interest rates could be the cause of the slowdown as well as uncertainty about the length of the cycle. To find out more about the multifamily market today and an outlook for what is to come, we sat down with Mark Ventre, VP at Stepp Commercial. Ventre recently joined the firm from Berkadia, where he served as director. Here, he gives us his insider take on the multifamily market.

GlobeSt.com: Overall, how does the apartment sector in L.A. County look right now?

Mark Ventre: Deal volume has been down nationwide over the past 12 months, and while the greater LA area hasn't taken as much of a hit as other markets, it is still off by around 20% from a year ago.  This is likely due to a 75-basis point increase in interest rates since December 2016, which has caused some investors to press pause.  There is also a tendency to circle the wagons when there is uncertainty, such as the ambiguity surrounding the new administration and its ability to proceed with its campaign agenda. Interestingly, prices have not come off their highs, and continue to break records despite the increase in rates.  Reasons for this are scarcity of inventory, an incredible amount of equity chasing a relatively few deals, and an increasing amount of debt funds that are making the capital markets more competitive.

GlobeSt.com: How do the next six to 12 months look like in terms of the availability of inventory for small- to mid-sized assets?

Ventre: The Fed's decision to end its Quantitative Easement program will force Treasury yields to increase, which in turn will cause interest rates to rise.  For many small- to mid-size apartment owners who have been contemplating selling, continued rate increases may be the catalyst they need to start unloading assets. As a result, we anticipate a modest sell-off over the next 12 months or so.  Furthermore, as the deadlines for soft-story retrofitting creep closer for the City of Los Angeles, many owners of the 13,500 properties with this issue will decide to sell to avoid the high retrofitting costs.

GlobeSt.com: What in your opinion are LA's top apartment markets for investment currently and why?

Ventre: Those seeking to add value/reposition see the enormous rent disparity between newer class A and B buildings versus older class C assets.  I especially like these older buildings because even when they are fully renovated, the rents still draft considerably under the newer product making them more affordable and attractive to renters.  Areas that offer the most value in renovating these buildings are in key markets like Hollywood, Koreatown, North Hollywood, and Palms/Mar Vista, as well as emerging markets like MacArthur Park, Boyle Heights, Van Nuys and Westchester.  The non-rent controlled suburbs have also seen considerable momentum in recent years, including Long Beach, Bellflower, Downey and Whittier, as well as cities close to the new football stadium such as Inglewood, Hawthorne, Gardena and Torrance.

GlobeStcom: Are 1031 exchanges happening more or less and what are investors trading into?

Ventre: The single-tenant NNN retail property market has seen an uptick in cap rates as more of these assets flood the market.  We are reaching a point in the cycle where it makes sense to exchange an apartment building at a 3.5% cap into a 5.5% or even a 6.5%+ cap deal for a national credit tenant with a long-term corporate guarantee or proven franchisee lease. These are especially popular for long-term apartment owners with below-market rents looking to sell their apartment at peak pricing and enjoy greater cash flow, a step up in basis, and a new depreciation schedule for tax shelter.