PMI Completes Another Creative Multifamily Apartment at 632 N. Occidental Blvd in Silver Lake

We are pleased to announce our completion of the renovation of a four unit apartment building, nestled in Northeast Los Angeles. The neighborhood is located in Silver Lake, and is known for its hip atmosphere and as an up-and-coming destination for millennials. This property demonstrates PMI’s Creative Multifamily Strategy. The property is located just two blocks from Sunset Blvd and Silver Lake Blvd and provides easy access to farmers markets, gourmet restaurants, wine bars, boutiques, specialty food stores, and much more!

Creative Multifamily is a new line of small, low-rise apartments that are stylish, contemporary, and playful, yet still affordable. The complex retains the flavor of its era, but incorporates a totally redesigned interior. Residents at properties like this are typically young and well-educated, and appreciate being located within walking distance of several diverse cultural amenities. In this area, a thrift shop with character is as popular as a high end boutique.

The property was completely renovated, allowing us to build this older apartment from most of the existing configurations. The townhouse units have bright and clean streamlined features, modern appliances, amenities, and lovely patios. Energy efficient stained and polished concrete floors in the living room and kitchen, hardwood floors in the hallways and bedrooms, and pristine marble flooring in the bathroom were added with the tenant’s comfort and style in mind. Below, see some of our updates. Here is the before picture of the older popcorn ceilings and carpeted stairs.

BEFORE

AFTER

We scraped the ceiling, replaced the carpeted threads with hardwood s, and polished the concrete slab to create an industrial, creative look to the living room.

The living room, dining, and kitchen were opened up into one great room.

Los Angeles Non Rent Controlled Apartments reached a milestone gross rent multiplier (GRM) of 15 times rental at the end of the second half of 2015, according to the Hanes Company. Cap rates for all apartments fell to 4.66% at the end of the second half of the year. Since the reported expenses for most small apartments are unreliable, I have used the GRM as a more accurate index. GRMs on the Westside are reported at 17 to 21 times rental. My own comps that track Echo Park and Silver Lake show GRMs at between 14 to 15 times rental. This is up from 10 to 12 times rental a few years ago.  My research can find no GRMs this high or cap rates this low going back to the 1920s. A Los Angeles Times article from 1998 reports a Grubb Ellis Survey showing 1998 GRMs at 5.75 times rental.  The previous peak occurred in the second half of 2006 when GRMs reached 14 times rental, according to Hanes Company data.

We are at the apex of the perfect storm driving these yields. First, interest rates are at historic lows. Investors are starving for yield. Second, we are witnessing the move of highly educated young people and tech/media/biomed companies to certain urban cores. “Unlike previous generations, today’s college graduates younger than 40 — the nation’s largest demographic — are moving in droves to neighborhoods in San Francisco, Seattle or New York,” Portland economist Joe Cortright said. According to Cortright, companies are also increasingly setting up in or near city centers, offering well-paid jobs to those graduates. As more people move to urban cores, they’re competing for a limited number of rentals. Housing construction is still lagging behind pre-recession levels, data show. (Los Angeles Times, November 15, 2015).

However, despite these trends, one has to reflect whether to buy at these levels reflects value investing or shrewd market timing.

At our November LACRA meeting, we discussed the tenant demand moving to Hollywood and Playa Vista. Hollywood is capturing the entertainment and media companies, while Playa Vista is attracting entertainment, advertising and technology. Both markets had a lot of brand new creative office space available and are attractive locations for Millennials to live. Firms like Netflix, Viacom, Chainsaw and Buzzfeed expanded or located to Hollywood, while Honest Company, Imax, and Yahoo are moving to Playa. Downtown has started to see some successful creative office developments but has not yet attracted large creative office users. Many still think it is just a matter of time. Many large tenants moved from Santa Monica due to the lack of available space and steep price tags. Santa Monica landlords will need to get their deal making hats on to fill 1.3 million of available space. Landlords continue to push the face rate and keep free rent concessions.  El Segundo has also reinvented itself as a creative office location and attracts Manhattan Beach denizens.  Los Angeles has a number of hot sub markets: Hollywood, Playa, Downtown, El Segundo.     Therefore, companies are more willing than ever to pack their bags and move to find the right space at the right price if necessary in one of these new sub-markets.

From Vornado’s annual report:

“I am beginning to get a little wary.  It looks like the easy money has been made for this cycle.  Asset prices today are high, well past the 2007 peak, and acquisitions are getting dicey.  Our sense is that this may be a better time to harvest than to invest…and that this is the time in the cycle when the smart guys start to build cash.  At Vornado, we will continue to build cash reserves for opportunities that will undoubtedly present themselves in the future.”