Multifamily price per units is showing far greater ROI in the last 48 months than any other property type in Southern California, according to a recent release from a representative of ARA Newmark. The statement says that institutional buyers of multifamily properties in this market were quieter in the first half of the year but are expected to explode in the second half.
The release also says that while many top buyers have relied on portfolio and entity-level acquisitions, several groups have primarily been single-asset buyers, and on the sell-side, some groups have predominately sold “one-off” transactions. Also, international capital sources increased acquisitions by 51 percent year-over-year, and student housing continues to attract significant interest from international groups, something to look out for in the latter half of the year.
But there is one caveat: The Costa-Hawkins Rental Housing Act. SoCal Real Estate spoke with Curtis Palmer, executive managing director of ARA Newmark, about the traditional multifamily climate and the student-housing sector in Southern California and his outlook for the rest of 2018 and into 2019, including investors’ response to this potential piece of legislation.
SoCal Real Estate: How would you characterize the traditional multifamily climate in the San Diego, Orange County, and Inland Empire markets?
Palmer: Despite some national indications of tightening in the traditional multifamily sector, the outlook for Southern California remains sunny through 2018 and into 2019. Housing shortages and higher costs of living in California hubs make for renter-dominant markets that are mainstays on the list of top metros for rent growth as well as sales volume. Investors consider multifamily assets here as defensive investments — unmatched for long-term reliability and yield.
A recent concern, however, is a November ballot measure to repeal the Costa-Hawkins Rental Housing Act and allow local governments to set rent control ordinances in newer apartment buildings and single-family homes. Many investors are cautiously optimistic that Proposition 10 will fail, but pausing activity until results are in.
Where are investors looking for deals in this market?
Increasingly, investors are noting which developers are enlisting focus groups and branding consultants to tailor-make product that drives the highest levels of demand. While much of Orange County and Inland Empire have seen of rent hikes of 4 percent to 5 percent over 2017, a few submarkets have stayed temperate. Costa Mesa is strong but a bit more affordable. We’re seeing investors find better deals in Irvine and Huntington Beach. San Diego is one to watch in 2019. City officials are proposing tougher inclusionary housing legislation to help solve its housing crisis and encourage greater racial and economic diversity in many neighborhoods. State laws now require multifamily developers to designate some units for low-income renters — usually around 10 percent. Proposed ordinances, which could come to a vote by year-end, could increase subsidized units to between 15 percent and 30 percent.
Where are the hot student-housing submarkets for investors in this region?
Student housing offers long-term investment stability, risk-adjusted returns, and a recession-proof asset class. Our Mid-Year Student Housing Market Overview puts 2018 on pace to reach the highest transaction volume and per-unit average in history. So far, private-sector buyers account for 41 percent of student-housing acquisitions with international investors at 22 percent due to formidable influx of foreign capital this year. With cap rates trading within 10 basis points of conventional multifamily, student housing is seeing multiple large-portfolio sales and aggressive capital pursing both core and value-add assets within walking distance of campuses. Beyond USC and UCLA, prime SoCal student housing markets include metro San Diego (Ashford, UC San Diego and San Diego State) as well as Fullerton and Long Beach (Cal State).
What is your outlook on the traditional multifamily sector in SoCal for the rest of the year and into 2019?
Last year marked the highest average multifamily sales value in a decade. Fundamentals remain strong in most Southern California submarkets, with the expansion of tech and entertainment sectors and the demand for new product among millennials and Gen Z. When investors see factors like that or San Diego posting a 19 percent jump in price-per-unit year over year, they have reason to be bullish through Q4 and into 2019. Our 2Q18 US Multihousing Report includes three SoCal markets in the Top 25 for sales volume in the last 12 months: Los Angles is third at $8 billion, with San Diego at $2.2 billion and Orange County at $2.1 billion. In the equity market, demand also remains strong among pension fund advisors, life companies, private-equity funds, REITs, and developers — particularly for true value-add opportunities. With the region projecting above-average economic growth and population increases through 2019, SoCal multifamily assets are a strong bet to outperform the national average.
What is your outlook on the senior-housing sector in SoCal for the rest of 2018 and into 2019?
Since Southern California is already a mecca for active living communities, senior housing in particular may present the strongest long-term fundamentals of any asset class — with an estimated 40 percent to 50 percent rise in demand nationally over the next 10 years.