Institutional Capital Sources Show Relative Purchase Restraint
By Ryan Patap
CoStar Analytics
June 7, 2024 | 10:16 AM
Recent multifamily sales activity in Greater Los Angeles remains muted, with private buyers filling the void left by other capital sources.
The first quarter of 2024 saw $971 million in L.A.'s multifamily sales, a pointed decreased from $1.3 billion in transactions during the fourth quarter of 2023. Recent activity was notably below the $2.2 billion in quarterly sales, on average, that the metro area has experienced over the past decade. As in many markets across the United States, higher debt costs have restrained sales activity in Los Angeles.
While transaction levels are down for all buyer categories in L.A., private buyers have increased their relative share of activity. Historically, private buyers made up around 70% of sales, but their share of acquisitions over the past 12 months clocked in at just over 80%. According to sales brokers, private buyers considering opportunities focus on attractively priced properties in higher-quality locations.
In April, a private buyer acquired 3025 E. Fifth St., a 20-unit building in Long Beach's Eastside for $5.8 million, or $290,000 per unit, at a 5.5% in-place cap rate. While the closing price was almost 20% above its last transaction price in 2017 of $4.9 million, or $245,000 per unit, the cap rate, 4.1%, was 140 basis points lower, demonstrating the impact of rising debt costs on what yields buyers will accept.
Institutional buyers, private equity and real estate investment trusts have somewhat retreated.
While these more sophisticated buyers have historically accounted for more than 25% of acquisitions, they represented just under 20% of buyer activity over the past year. According to sales brokers in the Los Angeles area, implementing the transfer tax — sometimes called the "mansion tax" — and increased concerns about the local business environment for owners have adversely impacted interest in properties on the market. Some investors have reservations about the impediments in recent years in evicting nonpaying tenants and rent control limiting landlords' ability to raise rents when operating expenses have risen considerably. For those considering deals, expected returns must be attractive enough to offset these concerns.
One of the most significant recent transactions traded for an attractive basis relative to replacement costs. In March, investment manager FPA Multifamily purchased 888 at Grand Hope Park, a 525-unit tower in downtown Los Angeles, from developer CIM Group for $186 million, or $354,000 per unit, around a 40% discount from the estimated replacement cost.
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