Los Angeles’ multifamily market is already experiencing uncertainty from rising rents and dropping vacancy, but high interest rates and the city’s looming tax on real estate transactions are adding to it. Bisnow spoke with New Standard Equities Founder & CEO Edward Ring on how this could impact L.A. multifamily investment in 2023.
During a recent attempt to acquire a property in North Hollywood, Ring saw firsthand some sellers attempt to exit the market before Measure ULA goes into effect and how this compares against an uncertain market and a buyer pool that expects to get an urgency discount.
“Everyone swarmed on this one property thinking it was going to be a deal, but instead, we came up pretty short in terms of where we thought value would be,” Ring commented. “Ultimately, the seller found out where the market believes the values to be and has elected not to sell,” he added.
The rising cost of borrowing is also putting pressure on the market but from a historical perspective, interest rates are “not too terrible,” adds Ring.
Despite historically staunch opposition from the multifamily industry, rent control is unquestionably gaining traction in municipalities around the country. Multi-Housing News interviewed New Standard Equities Founder & CEO Edward Ring on the silver lining of rent control in California but how poorly written laws could have adverse consequences in other jurisdictions.
“Rent regulation and the COVID moratoria helped keep rents from soaring out of control in California in recent years. This has forced cap rates down to unprecedented levels in the trendier markets,” commented Ring. “It may help the state stabilize through the next recession and a faster pace given the nature of tech employment and a persistent lack of housing supply. California doesn’t have that far to fall and recovery won’t take long.”
If cap rates compress by 250 points in the Sun Belt, it may cause pain for those who bought at peak pricing. California investors who bought similar product—but at a cap rate that compressed by 100 points, as the evidence suggests—may be rewarded for their investment in the Golden State, especially as wages are higher than average in California and supply tends to be constrained.
Despite these potential results, operators in cities that are implementing new rent control laws or make their laws too strict, may struggle to work under these constraints, explains Ring.
Read the full story “How Rent Control Ballot Measures Are Mounting,” here.
With increasing interest rates, rising unemployment and other factors, real estate investors may have to settle for less profit in the long run, Founder & CEO Edward Ring told KNX News Radio in an interview.
“The days of buying property with near zero interest rate loans and expecting big profits could be over for a while,” Ring said. “You might need to be satisfied with a 10-12% annualized return with your appreciation.”
Although, he noted that even with a lower profit rate, when compared to the volatility or downsides of stocks or other investments, real estate will remain a preferred investment vehicle.
Some multifamily investors, particularly private high net worth individuals, have been strategically leaving the West Coast for Sunbelt growth markets, but New Standard Equities Founder & CEO Edward Ring says it’s too early to write off the region. In an interview with GlobeSt.com, he explains that the capital trend out of the area is a mistake because the housing shortage provides great opportunity in both the short and long term.
“In California, greater Portland and greater Seattle, there is a tremendous shortage of housing and the available housing stock largely doesn’t meet the demand, and won’t for the foreseeable future,” said Ring. He explains that the demand comes from a highly educated workforce, many of whom work in leading tech and biotech industries and these fundamentals offset the political climate and other challenges of investing in the region.
“Investors may not love the political environment here, particularly in the Bay Area and Los Angeles metros, which admittedly adds some uncertainty to the region, but ultimately the fundamentals in the West favor multifamily investment. Over the long haul, we’ve all done quite well in navigating the complexities in this area,” he adds.
Despite headlines and the narrative that people are leaving California and the West Coast as a whole, Ring points out the current outflow isn’t a cause for concern. “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, including the markets that are seeing investor enthusiasm for the first time. It would take a long time for this economy to be replaced.”
Since the start of 2021, unprecedented rent growth and historic levels of liquidity in the capital markets have pushed valuations increasingly higher in the multifamily industry. In an interview with Bisnow, New Standard Equities Founder & CEO Edward Ring discussed the explosive growth in multifamily and factors playing into it.
While rents are rising across all markets across the country due to inflationary pressures, value-add properties are the most sought-after deals on the market, and the competition for them threatens to erase the very value proposition on which such deals are based. Reports of value-add properties being sold above replacement cost in the hottest markets have grown commonplace. “I think that the demand to put money out from some of the large investors and institutional groups has them making an excuse for why this or that property is particularly ‘special’, or, ‘Oh, you can’t build anything today so this or that one makes sense,’” said Ring.
The areas in which the housing market may be overheating are in the Sun Belt, particularly certain cities in Arizona, New Mexico, Texas and Florida. While population growth there has been the steepest since the pandemic began, and rent prices following suit, job creation over the long term may not keep pace.
Ring adds, “Even though supply is trailing demand in the Sun Belt, construction prices are lower than in traditional gateway cities and the threat of political intervention like rent control is more distant, making the prospect of development ramping up to close the supply gap more realistic than some might expect. On the West Coast, there’s so little land and there’s so little political will to allow developers to build more. If developers are really looking at runaway rent growth in the Sun Belt, or markets like that which have very few restrictions in terms of what you can and can’t build, I’d be cautious about those markets facing an oversupply problem in the longer-term.”
Chief Operating Officer Julie Blank participated on the panel, “Smarter Not Harder: Using Technology to Manage Properties More Efficiently & Successfully,” at the RETCON 2022 Multifamily Summit on April 14. Julie and four other panelists discussed ways to employ technology to manage assets, improve productivity and increase employee and resident satisfaction.
RETCON, a conference series that explores technology-driven innovation for multifamily owners, operators, & developers, held its 2022 Multifamily Summit at the London in Los Angeles and included 15+ speakers who discussed property management technology, dealmaking and financing, virtual leasing, real estate apps and more.