CoStar Insight: But in 2020, Investors Will Begin Dealing With California’s New Rent Cap
By Joshua Ohl CoStar Analytics
January 30, 2020
If investors were concerned about California’s pending rent cap law in 2019, they didn’t show it. Sales volume reached $2.5 billion in 2019, an increase from 2018. A quarter of investment volume originated with institutional, private equity or REIT concerns.
Several new properties sold in 2019. San Diego’s biggest landlord, R&V Management, purchased two of them in the first half of the year, Millennium Mission Valley and Vora Mission Gorge, for a combined $289 million. Totaling 679-units, the properties sold for an average of $425,000 per unit, and the transit-oriented developments increased R&V’s San Diego portfolio to more than 11,500 units.
Oceanside emerged as a popular target for value-add buyers in 2019. More than $250 million in sales recorded there as it continues to gentrify with new apartments, hotels, restaurants and bars.
Four communities sold for more than $40 million in 2019, and VUE Oceanside, since rebranded Carlsbad View Apartments, was a prime example of the type of investment buyers have sought there. The 1975-vintage community sold for $41 million, about $300,000 per door, at a 3.4% capitalization rate in November to a private investor. More than $1 million in capital improvements had been completed in 2018 by the seller, Pacific Urban Residential, and the buyer intended to continue the program. Pacific Urban purchased the 136-unit community in 2017 for $30 million.
Market pricing, based on the estimated price movement of all properties in the market and informed by actual transactions, nearly reached $325,000 per unit at the end of 2019. That was almost a 7% increase in pricing in the past year.
Market cap rates have flattened out and remained steady at 4.5% year-over-year. Cap rates are not expected to move more than 10 basis points in either direction over the next several years.
But investors will now navigate a market that includes a rent cap of 7.2% in 2020 for communities exceeding 15 years old. It’s pegged to 5% plus inflation. It’s possible that value-add buyers, those accustomed to purchasing properties and undertaking a capital improvement program, could adjust their strategies with the complexities built into the rent cap law. Both tenant relocation assistance and the breadth of renovations required to remove tenants could impact investment decisions going forward.
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