$402M Multifamily Transaction In Downtown LA Was A Bargain, Buyers Say

It's been five years since Mission Viejo-based Laguna Point Properties has owned a multifamily property in Los Angeles, but the company made a dramatic return in April, buying five properties in the heart of Downtown for $402M.

At that price, the transaction represents one of the largest in Southern California multifamily in more than a decade, according to Keller Williams, citing CoStar data. 

LPP sold its only LA property, a student housing development near the University of Southern California, five years ago. It shied away from the city in recent years because it wasn’t finding deals that would generate the yields it was looking for. The newly acquired properties, however, were offered at what LPP described as a slight discount, presenting an opportunity to return in a fashion that ticked its financial boxes. 

The company, which focuses on value-add multifamily, owns about 7,000 units across the western U.S., mostly in the mountain states, with a sprinkling in Florida. 

“The pricing for multifamily product had gotten really high,” Laguna Point Properties co-Principal Greg Campbell said of LPP's lengthy absence from the city. “The yield on investment was low. We just couldn't make the deals work.” 

But this transaction — for five adaptively reused residential buildings previously owned by Barry and Rommy Shy — was different. 

“This one was a more opportunistic play for us, where the price per unit was low, [and] it was a big discount to replacement costs," Campbell said. "It’s definitely a value-add deal with a lot of renovation upside." 

KW Commercial agents Gabriel Guerrero and Justin Chu represented the buyer and seller in the deal. The properties in the portfolio were SB Manhattan at 215 West Sixth St., SB Lofts at 548 South Spring St., SB Tower at 600 South Spring St., SB Spring at 650 South Spring St., and SB Main at 111 West Seventh St. Together, the buildings hold 1,037 units, for a per-unit price of approximately $387.6K. 

The average sale price per unit in LA County in the first quarter of this year was approximately $375K, a year-over-year increase of 10.1%, according to a report from NAI Capital.   

Campbell said protections in place in Los Angeles due to the coronavirus pandemic made it difficult for landlords and owners to collect rent, and that led to lower collections across the portfolio. That had an impact on pricing for the properties. Rent collections in 2019, prior to the pandemic, were about 99%, but are now “in the 85%-90% neighborhood,” he said. 

Another factor contributing to the “really good pricing” of the properties, Campbell said, was that they needed work and hadn't been renovated in over a decade. LPP will spend about $20K per unit on upgrades to interiors, exteriors and common areas of the properties in hopes of seeing $200 to $300 monthly rent increases. 

The properties, built prior to the 1960s, with some dating to the 1920s, are former office-to-residential conversions.

Common area renovations should be done in about 18 months. Interior renovations to units could take a couple of years as those will be completed as tenants move out.

With this purchase, Campbell said LPP is being approached by brokers and owners with other potential deals. While it is shopping around, no additional purchases are imminent. 

Downtown Los Angeles was changed by the pandemic, as workers stayed home, and restaurants and bars, once major draws, became places to avoid amid fears of spreading the virus. Campbell expects that bustling crowds will be back in force. 

“We've already seen some efforts to try to make the Downtown area a little bit safer,” Campbell said, noting the return of some Financial District workers earlier this spring is already helping. As more people come back to the neighborhood, it’s begun to feel less empty and, in turn, safer, he said.

Apartment occupancies have returned too: A report from the Downtown Center Business Improvement District found occupancy rates by the end of 2021 were at 93.5% — a big jump from 86% at the same time in 2020. Downtown’s average effective per-unit rent was at $2,759 in late 2021, up from $2,363 the year before.

“We felt like we were buying into that kind of momentum in Downtown,” Campbell said.