California’s Affordability Crisis Attracts Investors

While some investors are leaving the California market, others are arriving. The affordability crisis is attracting domestic capital sources to take advantage of the market fundamentals and demand for moderately priced and affordable apartment units. LEM Capital, a Philadelphia-based investor, is an active class-B apartment investor in Sacramento, Orange County and Los Angeles—and it continues to be bullish on the market. In fact, the firm has purchased $326.5 million in real estate throughout California. We sat down with Josh Grossman, a SVP of acquisitions at LEM Capital, to talk about the firm’s California strategy, how the affordability crisis has influenced its strategy and why now is still a good time to be a net buyer in California.

GlobeSt.com: Tell me about you attraction to California markets and your investment strategy here.

Josh Grossman: A lot of what drives our business is the lack of affordability across the country. Grey-collar people that make the median income are really just trying to get into safe, clean and affordable housing. California is really the epicenter of that. Single-family homes are very expensive, and it is very expensive to build new apartments at all, let alone anything that is targeted to workforce tenants. I think the supply demand fundamentals generally in Southern California as strong as they are anywhere else in the country. We have been buying in California for the last 10 years, and we tend to cycle in and out of the market; however, we continue to see strong organic rent growth. A lot of that is driven by the fact that there is a real shortage of affordable, quality apartments in Southern California. Layered on top of that, you have a huge gray-collar job base, and that is who lives in our apartments. That is anyone that is making $35,000 to $75,000 per year. We provide properties that are class-A like in terms of their amenities, staff and attention to detail, but we are more value-oriented on interiors and at a more moderate price point. That is very difficult to find in Southern California, generally.

GlobeSt.com: Is the affordability crisis a main driver of your interest in California?

Grossman: We have been studying the macro trends for a number of years, and that has really oriented us toward the space. We have a very research-driven process on a deal-level basis. Looking at the strategy, we apply the same approach at a higher level. The other dynamic that you see is the transportation challenge. It is very difficult to get around Los Angeles, and people want to live in the general proximity of where they work. As a result, there are a series of apartment nodes across the MSA, all of which serve as good fertile ground to buy properties. At a very high level, you have this dynamic where there are a lot of high-quality jobs that are geared toward the median income or just above, you have a real lack of affordability, you have a lack of new construction of apartment, you have a growing population base and you have transportation dynamics that force people to live in a wide-range of places across the MSA. We have had an enormous amount of success in the market, and it continues to be a productive market for us.

GlobeSt.com: You mentioned cycling in and out of the market. Are you cycling into the market now?

Grossman: We are constantly on the hunt for properties in Southern California. It is a very competitive market, and it has been harder to buy in the last 24 to 36 months than it was in 2013 and 2014. We are still very actively looking, and we have a number of opportunities that we have been looking at. We have always had a meaningful ownership stake in Southern California, but the number of assets has ebbed and flowed. It is a market that we really like, but it is a challenge to make sure that we are buying the right deals. One of the benefits of being an allocator and investing in markets across the country is that we can move around and be more opportunistic in terms of the properties that we are buying.

GlobeSt.com: Why are you focusing on the Sacramento, Orange County and Los Angeles markets?

Grossman: We have looked in San Diego and the Bay Area over the years, but we haven’t found the right confluence of operating partners, opportunity and location. We are open to other markets, but we have found better opportunities in Los Angeles, Orange County and Sacramento. One of the reasons that we remain bullish on Southern California is that it was a little later out of the recovery. When we were buying in 2013 and 2014, we kept hearing that the rent growth was coming, but it was slow to take hold. Over the last 24 to 36 months, the job growth and rent growth has really picked up. We think that really creates buying opportunities.

GlobeSt.com: California has become a very competitive market, and we are seeing a lot of local capital sources leaving to look for yield elsewhere. Why or how have you continued to be a player in this market?

Grossman: We do look in those other markets, but we continue to believe in the California story and Southern California in particular. The supply and demand dynamics, and those fundamentals in Los Angeles is more favorable to the kind of investing that we do really anywhere else in the country. We really try to find properties that are underperforming where they should be, whether that is because the asset has been capital starved or whether the owner doesn’t have real estate expertise. We are focused on assets where the rents are lowers and the expenses are higher then where they would be if they were professionally managed. If you can find those opportunities, then we think that we can really drive value. We are not bidding on every marketed deal, but our business model allows us to be opportunistic and focus on deals that are underperforming. We look at value-add as downside protection just as much as we look at it as upside. There is no doubt that the market has become more competitive, but we still believe that there are opportunities out there because not every property is being professionally managed or have been as well capitalized as they could be.