After years of low inventory and high demand driving up prices for multi-family properties in Long Beach, sellers are finally starting to see some pushback from buyers as high sales prices reduce potential for sizeable return on investment, according to local real estate agents.
In the past few years, Long Beach multi-family property owners would price their properties slightly higher than comparable properties that had recently sold due to upward momentum in the market, according to Steve Bogoyevac, first vice president of multi-family investments for the local office of Marcus & Millichap. “Now I’m starting to see buyers pushing back a bit on those higher prices,” he said.
“You aren’t seeing it today, because these are deals that are in the works,” Bogoyevac noted. “You’re going to notice it in the comps [price comparisons] a couple of months from now when things have closed,” he added.
“Don’t get me wrong – you take the right property to market at the right price, and there’s still massive amounts of interest and offers and people fighting for the deal,” Bogoyevac said. For example, he just closed a deal on a multi-family property on Ocean Boulevard that had six offers. The chosen buyer paid cash and closed in 17 days. “It’s not every deal that I see pushback, but I feel it in certain deals here and there more than before.”
Eric Christopher, an INCO Commercial senior associate specializing in the multi-family market, said demand to buy apartment buildings in Long Beach is still very high, particularly for higher-quality properties.
“The demand is still huge,” Bogoyevac said. “It comes down to the lack of inventory, and the cost of debt is inexpensive.” He noted that investing in hard assets like multi-family real estate is a hedge against inflation as opposed to investments in the stock market.
While the inventory of available properties increased by 20 to 25 percent from the last quarter, inventory is still very low, Christopher noted. “We’re seeing more inventory, but we’re still below where we averaged over our five to seven-year period where there would be, say, 65 to 110 buildings on the market at one time,” he said.
As of May 3, there were 47 five-unit-plus buildings on the market, according to Bogoyevac.
Christopher said sellers may be more willing to put their properties on the market because the Federal Reserve hasn’t raised interest rates by much, leaving the door open to a high-demand market among buyers seeking to take advantage of low rates while they still can.
Lower-quality buildings – typically those built before the 1980s that are in less desirable neighborhoods and in some degree of rough condition – may have reached the top of their price point, by Christopher’s estimation. These are riskier investments because they require more maintenance, so the revenue stream-to-debt ratio may not be attractive if prices go any higher, he explained.
“On higher-class assets, you’ll see the prices edge up nominally, although we are really getting to the top of feasibility,” Christopher said. Higher quality assets, which include newer construction in highly desirable locations like Belmont Shore, are approaching a 3 percent capitalization rate. This means that a buyer of such a property would only net about 3 percent more revenue than what they’re paying for the property.
The vacancy rate of apartments in Long Beach is at about 2.7 percent, which Bogoyevac said is very low. “Even with a lot of the new developments coming on board, we don’t really see that changing,” he said, referring to several new apartment projects in Downtown Long Beach. “There is a lot of household formation and there’s not enough rental places to go around.”
As a result of high demand to rent and a high occupancy rate, rents are increasing. “Right now, rents are going up and vacancy is going down,” Bogoyevac said.
“You can assume for the rest of this year, 2017 and probably 2018, there will be upward pressure on rents,” Christopher said. “We’ve got a good employment environment, we have households being created, but the barriers to entry for homeownership are still very strong. And we have a housing shortage,” he explained. “So, in my mind, you’re going to be in a rising rent environment for the next few years almost for sure.”
Landlords are likely to raise rents 10 to 15 percent a year, unless their units are currently priced below market, in which case increases may be more aggressive, according to Christopher.