LOS ANGELES-Year-to-date, low interest rates and strong operating fundamentals have fueled the multifamily investment market and boosted values, but in recent months, the industry has seen rates begin to rise. Paul Daneshrad, CEO of StartPoint Properties, a Beverly Hills-based commercial real estate company with a portfolio worth $800 million in owned properties, sat down with GlobeSt.com to discuss the current multifamily investing market.
“As interest rates start to creep up, 120 basis points over the last 3 months, this has put some pressure on pricing,” says Daneshrad. Los Angeles is currently performing in alignment with the other two major Southern California submarkets, San Diego and Orange County; however, the most growth is currently coming from Northern California, which is one of the key markets in the nation, showing double-digit growth over the last several years.
In terms of development, the downtown area is still receiving the most notable new construction, including high rise office buildings the Wilshire Grand, the Millennium Hollywood and the Century City Center. Daneshrad also notes that the Wilshire Corridor and the Westside are experiencing active development.
Investors, though, should be focused on the slow rise of interest rates and their impact on values. “If your investment strategy is to sell and exit in the next three to seven years, underwrite your exit cap rates at a level that is realistic with where interest rates are likely to be at that time,” says Daneshrad. And that is, higher than they are today. Interest rates are currently at an historical low, but as the market corrects, rates and values will begin to balance to what Daneshrad calls an “historical average.” Investors should also be aware of economic cycles and another possible recession in the next two or three years.
“We are in the fifth year of the current economic expansion, and the average expansion lasts seven to eight years,” explains Daneshrad. “Be careful, the next recession could be around the corner, and with our structural issues and a dysfunctional Congress, the next recession could also be at a crisis level.”
Daneshrad is a multifamily expert, who has contributed commentary on the multifamily sector for GlobeSt.com. He recently promoted multifamily renovation as a viable investment option for markets with high demand and low supply in a experts article. Although that is still an option for investors in the right market, here Daneshrad warns investors to keep an eye on interest rates before taking action.
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Kelsi Maree Borland
