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Here's What's Happening In The Market, Here’s What This Means For You
Apartment Investors, Operators Expect a Great 2022.
Here’s Why
With the darkest days of COVID behind us, apartment investors have reason to be optimistic. Here are the key trends that will shape new multifamily investment and development in the coming year.
Back to the City
Despite concerns and the extension of work from home for many, big cities are once again attracting renters who crave social interaction, culture and entertainment.
Focus on Existing Assets
Factors such as COVID, work from home, migration to the suburbs, the tight labor market, rising construction costs, and supply chain issues all suggest a continued focus on existing multifamily deals. Whether big or small, Class A, B or C, the risk is taken down several notches. In particular, value-add deals, workforce housing and affordable product being super-hot throughout 2022.
An Appetite for Redevelopment
The decline of regional malls, accelerated by COVID and online shopping patterns, will continue to create interesting multifamily redevelopment opportunities in 2022. Another multifamily redevelopment opportunity that may take off in 2022 involves office buildings that are experiencing increased vacancy. You’re buying into a product that already exists and you’re taking lots of risk off the table.
New Construction Methods
Despite the many potential setbacks facing developers, there are more multifamily units currently under construction than any time since the mid-’70s, according to the MBA, and discussions will widen in 2022 about how multifamily projects are built and which materials work best.
The Wildcards
One wildcard that investors are keeping a watchful eye on, when deciding which markets will yield the greatest return on investment in 2022, is the effect of regional government regulations.
Meanwhile interest rates are expected to rise in 2022. The question is by how much. Still-favorable borrowing rates, combined with an ongoing shortage of single-family homes for sale, however, are expected to create sustained market demand for multifamily units.
The Pulse of the Market
The listing inventory throughout Southern California continued to decline. Most areas are seeing the lowest inventory levels ever. Months of inventory have declined to just 2 months in Orange County and Long Beach. The monthly Absorption Rates are hovering below 1 month or slightly above. The Closed Sales Average Days on Market, for the most part, remains between 30-45 days. With the number of listings declining, the Active Listings, Dollar Volumes has also dropped. Listing activity should rebound as we move through the first 2 months of the year and head into spring, summer. Remarkably, we’ve seen the number of weekly Active Listings moving to Active Under Contract status hold pretty steady throughout the last couple of months. Average Cap Rates and Average Gross Multipliers are seeing minimal change. In most cases, buyers looking for a good deal are forced to try and create a deal by negotiating astutely.
Orange County
The first couple of weeks of 2022 has seen strong weeks of closed sales in Orange County. Looking at the monthly charts, the Total Number of Sales increased in December from the previous month. Looking at the Number of Active Listings, the increase in the number of monthly closed sales occurred even with inventory levels declining to their lowest point in the last 4 years. Looking further at the monthly Number of New Listings dropping to its second-lowest point in the last 4 years, the increase in closed sales is even more of an indication of the extremely strong demand for Orange County multifamily real estate. Even though there has been a gradual increase in the Average Days to Sell over the last couple of months.
The Orange County SALE OF THE WEEK is a 6 unit building in Orange on Palmyra Ave. The property was initially listed at $2,900,000 and sold at $2,400,000 in 75 days. Built in 1964. The major cross streets are Main St. and Chapman Ave. The property consist of two side-by-side triplexes. Each triplex consisted of one 3 bedroom 2 bath single story unit with a fireplace and two 1 bedroom 1 bath units. There are 6 enclosed garages. The property sold for $485 per sq. ft. The average price per sq. ft. in the city of Orange is $516. The property sold at 27.9 x gross, but the existing rents were extremely below market. There was approx. 44% upside in the rents. Using market rents the gross rent multiplier would be projected at 16.1. The current cap rate was 2.5% and the projected cap rate using market rents is 4.3%. This sale is an example of a deal that was created out of a listing that was overpriced to start. The final sales price was negotiated to a realistic price based on the property’s true value.
This week’s Orange County DEAL OF THE WEEK is a 6 unit building in Fullerton on Porter Ave. The property is listed at $1,759,000. The major cross streets are Euclid St. and Orangethorpe Ave. Built in 1958. The building consists of six 1 bedroom 1 bath units. Rents are approx. $1,500 each putting the gross rent multiplier at 15.9 and the cap rate at 4%. The price per sq. ft. based on the list price is $447. The Average Price Per Sq. Ft. in Fullerton is $535. The building has recently undergone substantial renovations that include new dual pane vinyl windows, exterior paint, new garage doors, and extensive facia board repairs. The building is professionally managed by a third-party management company. Units are separately metered for gas and electricity. Take a drive by the property and see if it fits your investment criteria. If you’re interested in making an offer let me know.
List of Closed Sales
Live MLS Link PDF Link SALE OF THE WEEK DEAL OF THE WEEK
Southern California
There was a further decrease in the Number of Listings and the Number of New Listings, which dropped to just 19 new listings last month, we’re now at the lowest point of listings in the last 4 years. Even with this drop in inventory, Long Beach multifamily saw an increase in the Number of Sales last month. The Days to Sell Average dropped back down to the level of previous months after the sizeable increase last month. The monthly Absorption Rate dropped from 2.36 months previously to just 1.4 months currently.
The Long Beach DEAL OF THE WEEK is a triplex on Loma Ave. The property is listed at just $899,000. This is a really good price for a triplex in Long Beach. Built in 1920. The major cross streets are Redondo Ave. and Pacific Coast Highway. Most units have undergone some remodeling over the last couple of years. A buyer could spend some money on new landscaping and a driveway to fix up the exterior and curb appeal. The units are separately metered for gas and electricity and water meters have been installed for each unit, however, they have not been connected yet. By connecting the water meters and therefore reducing the expenses, this property would generate a nice cash flow. The units consist of a 2 bedroom 1 bath, a 1 bedroom 1 bath and a studio unit.
List of Closed Sales
Live MLS Link PDF Link DEAL OF THE WEEK