Out-of-State Units

With the rapid rise of prices for apartment building in California, real estate firms in the Valley region are turning to out-of-state investments.

Tarzana-based Gelt Inc. has made major acquisitions in Gresham, Ore., the suburbs of Denver and even Albuquerque, N.M.

And Encino-based multifamily investment and management company New Standard Equities just acquired a pair of neighboring Pacific Northwest assets – Cedar Glen and Maple Manor – rebranding the combined 144 units as Indigo Apartment Homes in Bremerton, Wash. The company spent $20 million to purchase the twin properties and already has planned capital expenditures of about $3.3 million to reposition the property.

Meanwhile, Investors Management Group just purchased the Azul Apartments with 246 units in San Antonio, Texas, in addition to having invested in markets such as Denver, Atlanta and Raleigh, N.C. The Woodland Hills-based real estate investment firm, which to date has acquired more than $241 million in multifamily assets across the Southeast and Texas since the start of the pandemic, now owns 798 units in San Antonio and 4,000 units nationally.“We have not purchased anything in California in five or six years,” said Karlin Conklin, IMG principal and co-president. “Today, we don’t own any real estate in California. We’ve never primarily had California holdings. We have our office in Portland, Ore. because that’s where the principals are located.”These firms are following the money and it’s taking them well beyond the Golden State.“You’re seeing a huge exodus to places like Texas, Georgia, Florida,” Conklin said. “In multifamily, an investor, you’re looking at market growth and job growth. For us to invest in improving a property, we’re looking at places with technology jobs, so the population is moving out of California and a lot of those investment dollars are moving out, too.”The firm also desires submarkets with affordability.“Someone can have a very nice apartment still in Charlotte and Raleigh and San Antonio, and that’s where we believe there’s opportunity,” Conklin said.“This has been a growing trend for at least five or six years,” said Sevak Keshishian, leader of SK Group at Calabasas-based brokerage Marcus & Millichap Inc. “The trends for us have been affordability.”Tech migrationSome of the submarkets outside of California are connected to the tech industry workforce that is migrating out of state.“Companies are leaving for the tax reasons,” Keshishian said. “A lot of it has to do with regulatory stuff and moving money into states where there is no rent control.”In February, Gelt spent $101 million to acquire Regatta Apartments, a 352-unit multifamily complex in suburban Denver. In November 2019, the company paid $61 million for another multifamily complex called Timber Lodge in the same market.

Seattle and Salt Lake City are two more markets where Gelt has been active, purchasing a Seattle apartment portfolio with 491 units in two submarkets for $74 million in April 2018; and owning another 247-unit Salt Lake City complex, which it sold in December 2018. The company has invested heavily in Oregon, picking up the Silverwood Apartments, 164 units in Gresham, for $30 million in September.“We like to diversify geographically,” Gelt principal Keith Wasserman said. “We’re only buying in certain submarkets.”The Tarzana company averages a major investment per quarter, Wasserman said, and Gelt has become surgical in identifying growth markets. One of the company’s earliest targets was Phoenix back in 2010, but the market since has exploded with cap rates now similar to Southern California, making it less viable.Another factor driving out-of-state investment is that building in Southern California has become more difficult.“Low interest rates have always been a driver to purchase assets, but the much better driver for going out of state is value add deals that are easier to complete out of state,” Keshishian said. “I own property myself in Arizona – my partners I and have flipped over $50 million worth of property. We were able to get creative financing, invest much quicker, renovate, reposition and put it back on the market. It’s so much easier to … execute out of state.”An up-and-coming submarket right now appears to be Albuquerque, and while this New Mexico market may not achieve the investment highs of a California or Arizona, it’s reliable.“We began investing here four or five years ago,” Wasserman said. “The highs are not as high and the lows are not lows. It’s a very stable market with good cap rates.”Closer to home?One questionable market to invest in multifamily may be the very backyard of where these firms call home.

“It would be easier if we bought in California,” Gelt’s Wasserman said. “We wouldn’t have to hop on a plane.”Because of a general lack of inventory and growth and the state of California and Los Angeles County have become so restrictive, particularly with the imposition of rent control, there is not as much space to profit by investing in the North Los Angeles market.That said, Wasserman remains bullish about the region.“We’re still actively looking in those markets: San Fernando Valley, Northeast L.A., Antelope Valley. … I like Santa Clarita, it’s a better area with better long-term (potential).”Marcus & Millichap’s Keshishian said that — no surprise — entertainment industry rich Burbank is a Valley submarket that does well in multifamily. More people are also looking at Valley Village and properties in Van Nuys, which will eventually gentrify but is presently stymied by rent control.At IMG, however, investing locally is less likely to glean an upside.“The rents are already nosebleed in some areas,” Conklin said. “So, with the affordability of rent itself, it’s hard to see where we’d get additional value.”Certain out-of-state markets are already played out, according to Keshishian. Austin and Dallas-Fort Worth, for example — where many California tech companies have been migrating to — has been “tapped out for a while…but as far as Houston and San Antonio go, you can still find decent deals there.”Still, IMG’s Conklin insists, “the suburbs have more interest to us than they had three years ago.”That’s because Conklin and her colleagues believe that working remotely will become part of the permanent workforce landscape.

“We do not believe it’s a gamble,” she said. “This is a paradigm shift.”