Cashing In On Record High Prices!
Apartment sales prices in 2015 hit record highs in many areas throughout L.A. and Orange County. As real estate brokers, we had a great year in 2015, assisting our clients with getting their properties sold for handsome profits and setting local market pricing trends. By understanding the market trends and real estate cycles, we have been able to assist clients to leverage value and cashin on these record level returns.
Let’s take a look at the city of Whittier as a case study: in 2015, there were 57 transactions with an average CAP rate of 4.8%. As listing brokers, we were able to list and sell a 7-unit building at a record-breaking 2.93% CAP rate, bringing in the highest sales price for the area.
Now let’s move over to a rent-controlled property located in Chinatown, where there were 30 sales transactions in 2015 and an average CAP rate of 5.64%. Here we were able to sell a property based on upside potential at a 2.25% CAP rate, which is record-breaking for a rent-controlled property in this area.
Now what does this mean to you as a potential seller? It means a lot! As an investor, one must seriously take a look at the market as it sits today, and know whether or not this is the time to either make a move to sell and cashin, or sell and 1031 exchange to a superior property. We know historically that as interest rates increase, so will CAP rates; and if CAP rates increase, the math is simple. The bottom line is,prices decrease.
At the end of the 4th quarter in 2015, the Fed had a very slight increase in interest rates, which didn’t appear to affect the status of the market at the time. Sales certainly decreased at the end of 4th quarter, which is not an uncommon trend for the end of the year. But 2015 was a bit different because 4th quarter sales slowed as CAP rates reached all time lows; better yet, apartment pricing hit all time highs. A couple of reasons for the slowdown in apartment sales were the record high prices and lack of inventory, which has become a really big problem in today’s market, fueling the flames of high prices. Lack of supply will always cause an increase in prices, as where there is a lack of supply we know demand goes up, causing prices to increase.
Now as we enter month two of the 1st quarter of 2016, we thought an article reaching out to investors and property owners who might be considering selling would be helpful. For those property owners who simply want to know if this is the right time to sell, take into consideration the following matters. As experts in the management, marketing and selling of apartment buildings, we find it real simple to make a decision whether or not this is the time to sell. You see, as long as interest rates stay low, so will CAP rates; and as long as CAP rates are low, sales prices are high. It’s that simple. No one has a crystal ball, however the more educated and active one is in the multifamily market, the more informed actions one can take. Understanding and properly analyzing market trends and real estates cycles is the key to success. We all know the Fed is bound to increase interest rates in the near future based on our economy appearing to be stable with signs of growth. However, as we enter this year’s presidential race, Wall Street always gets nervous, and the last thing the Fed will want to do is upset the market by a drastic increase in interest rates.
What affects interest rates? Well many things of course; however thus far, the one power controlling interest rates is the hand of the Fed and their need to drive our U.S. economy. It appears on the surface that the federal government has effectively done a good job of keeping rates low and building a thriving real estate market, from residential home sales to commercial and multifamily sales.
Another indication for stable high price values for multifamily investments is the fact that we can count on the future growth of our rental market here in California. In 2016, we can expect a potential growth rate in rents of 8% throughout L.A. and Orange County, with some areas having the potential to hit double digit growth. Because of the lack of rental inventory in L.A and Orange County, in part due to over population growth in California, our apartment industry is set for steady growth in 2016. In the City of L.A. alone there have been over 20,976 units approved for new construction in 2016, and even with those added units over the next few years there is still a projected lack of inventory, which is confirmed by our strong rental market of a 97.3% occupancy rate.
To sum up, this is a great time for our industry, as rental rates rise and apartment values increase. If you are considering selling, 2016 may prove to be an extremely profitable year.