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REA
July 19, 2017  

Value-Added Shop Scooping Up LA Rentals

Fledgling investment firm Strategic Housing Partners is placing big bets on the red-hot Southern California apartment market.

The El Segundo, Calif., shop was formed last year as a joint venture between Coastline Capital of Los Angeles and New York-based JDR Holdings. Since then it has quietly snapped up nearly $300 million of rental properties in Greater Los Angeles, via an ongoing strategic partnership with Boston fund shop Rockpoint Group.

Strategic Housing aims to make another $500 million of acquisitions in the next 12 months, said principal Steven Ludwig, a co-founder of Coastline. The firm targets properties that can produce value-added returns after being upgraded.

“We’re primarily focused on Southern California, and we love Los Angeles County,” said Ludwig, noting that growth in tenant demand is far outstripping development in the region. “If you look at the number of new units being built, we have some of the lowest ratios [to existing stock] in the country. And the new construction is concentrated in a few areas.”

The shop also looks at Orange County and the San Diego area. The strategy is to pump money into renovating units at Class-B and -C properties in secondary and tertiary submarkets to lessen the gap between those and the flashy new offerings in downtown areas.

Strategic Housing’s most recent acquisition is typical. This month it paid local owner Don Wilson Builders about $178 million for three 1960s-vintage properties, encompassing 506 townhouses, in Torrance, Calif., where few units have been added in the last decade. The shop plans to spend about $20 million on upgrades, including vinyl plank flooring, stainless-steel appliances, quartz countertops and new bathroom fixtures. It also favors opening up floor plans of older units by knocking down kitchen walls and eliminating thresholds between rooms.

The joint venture’s other deals to date were the $34.3 million purchase in March of the 94-unit Marathon Towers, in the Virgil Village neighborhood of Los Angeles, and last year’s acquisition of 14 San Fernando Valley properties, totaling 592 units, in several transactions totaling $81.2 million. It’s planning to invest another $14 million improving those properties.

Multi-family investors targeting core-plus or value-added returns are putting Southern California, especially Greater Los Angeles, at the top of their shopping lists this year. Initially slow to recover from the downturn, the market has surged in recent years. Employment growth has been driven by an influx of top-shelf technology companies and a resurgence of the media and entertainment industries.

Marcus & Millichap ranks Los Angeles as the nation’s top rental market in terms of fundamentals and attractiveness to investors. The overall occupancy rate is 97.3%, rents have risen an average of 5% annually since 2013, and the 10,900 units slated for delivery this year represent less than 2% of the total stock, according to the brokerage.