If you own any real estate in Echo Park, than you know you’ve got something people want. Condos, homes, vacant lots, mixed use, anything at all! But if you happen to own an apartment building in Echo Park, then you’re sitting on a gold mine. If you’re an apartment owner, then you probably already know this because you’re getting a harassing level of marketing “gently”, consisting, and overwhelming pushing you to sell.
It’s clear to me that Echo Park has hit critical mass since investors of all kinds are clamoring to invest in the area, looking for both finished product at retail prices at roughly mid-4% cap rates, and sub-4% cap rates for apartments with deferred maintenance and have severely below market rents (and so huge potential upside in rents).
If you own in Echo Park and you decided to sell right now, then you’d be making a wise choice because we’re seeing very clean apartment buildings for sale hit the market and easily command 4% cap rates. These apartment buildings have renovated interiors, renovated exteriors, upgraded common areas, new building systems (foundations, copper plumbing, etc) and of course and most importantly, market rate rents.
But whether the buildings have been polished or ignored over the years, all of these lower cap rate sales (historically lower by any standard applied in Los Angeles) don’t seem to have any reason of climbing back up in the near future. More than I have ever seen since I started buying and selling here in 2001, there is a tremendous amount of interest in the area and push in values across the board. The up swing in value is only accelerating with this newfound competition among tenants searching for apartments to rent, and among investors searching for apartments to buy in the area.
On a weekly (and sometimes daily basis), I get cold called by newer syndicators representing investment dollars from the San Fernando Valley, the Westside, and the San Gabriel Valley. I noticed this bigger shift in investment in the summer of 2012 when I wrote about it in my BRE Investment market report, but now the conversations about the area are at a fevered pitch.
I hate to say this, but there’s a slight tinge of desperation in investors’ voices, because they, like everyone else, don’t want to be left out of the party. And so my phone continues to ring uncontrollably. Throw in the occasional Orange County investor calls, mortgage broker calls, and hard moneylender calls, and it’s sometimes difficult to get any work done.
For the properties that have tremendous up-side value (rents painfully below market and frozen there because of rent control), there are buyers willing to pay below 4% caps. This is not because they want to take their funds from the relative safety and comfort of their bank accounts earning less then 1% and make, say 3.5% cap (or ROI), but because they are able to relocate, renovate and lease out at market rate rents and immediately increase their value of the property in a dramatic way. Or at least take the risk in trying.
So the take away is if you own anything in Echo Park, anything at all, then you better seriously consider selling. This doesn’t mean you have to, but it means you should think long and hard if no is the right time to make an exit on one of your properties in the area because we’re in a unique investment atmosphere. While there’s still plenty of momentum and time to sell this year, I don’t believe these low caps will stay around forever (2-3 years out), so it might make sense to sell now and capitalize on the fervor, especially if you’ve owned for 10, 20 or 30+ years and have deferred maintenance and low rents.
Please call me if you have any questions.