The Allure of Class C Apartment Properties

LOS ANGELES—Despite the uncertainty within the market, class C properties are being touted as the best-positioned property for an economic slowdown by some experts in the market. During a panel discussion at the national GlobeSt. Multifamily conference here in Los Angeles, panelists discussed the gap between rent rates for class A and class C properties and reviewed some of the current trends within class C properties.

According to Henry Manoucheri, chairman and CEO of Global Integrity Realty, the institutional market is flush with capital. There is a bidding frenzy in southern California as well as in places like Phoenix, Denver, and areas of Florida among other places, he explained. 

“You will have 20 to 25 buyers on anything trading above $25 million. For some reason, all these sellers want to sell this year. It is crazy,” he said. “But the $5 million to $15 million space isn’t as competitive and you can pick up these smaller properties at probably about a 4 cap rate and there is a lot of upside.”

Ryan Wagner, an EVP at Colliers, agreed noting that the institutional space is an absolute circus and being able to execute is key.

If you are a large owner, that is a competitive advantage in potentially winning a smaller deal, Manoucheri said. If you have a few thousand units, it is far easier to be the gorilla in the room to show proof of funds etc. “If you cannot convince of where the money is coming from to the point of sending bank statements, you will lose.”

Another key in winning the smaller deals is to know the brokers, be nice and “basically do what you said you were going to do. It is all about reputation,” he added. 

According to moderator Mike Rovner, head of Mike Rovner Construction, the people who are successfully executing the deals are ones who also have vertical integration. “When you are looking at deals, you have to find competitive advantages. You have to find some way to take a deal and squeeze the juice out of it.”

When looking at some owners selling off and leaving California, panelists say that Covid expedited a lot of people’s exiting of California but note that the notion that California is dead and not coming back is short sighted. “Rent control and political risk, though, cannot be underwritten,” said Wagner. “It is the unknown and is scary. For those leaving CA, we are seeing others double down here in the state.”

Manoucheri agreed that it is the legislative risk that has put a lot of people out of California. “What we have also seen is 95% of tenants today in our portfolio who haven’t paid rent and the government is now paying, the minute the check comes in, they say they aren’t paying again,” he said. “They said they are going to stay home and not work but they are packed in line buying expensive items on Rodeo Drive…They are spending their rent money on retail.”

If you are a contrarian player, he continues, while the flight to suburbs should last for two to two-and-a-half more years, the opportunity if you can stomach the interim pain would be to buy in an urban market. “You can buy today in New York City at a 6 cap and maybe you can do the same thing in Los Angeles, but how many owners can hold on that long?” He continues that New Jersey was the beneficiary of New York City, for example, and many who were betting against New York are sorry they did that. “You cannot replace that urban market…people are now moving back and rents are stabilized. We are social creatures by habit.”

Northern California is the same, explained Wagner. “Rents in the urban core went down 20-25% and in the secondary or tertiary market, rents went up 20%. People are moving an hour or two away.” Wagner’s bet is that a year or two from now, those rent growths will taper or have a modest correction in the suburbs and the rent swings back to the urban. “To jump at the froth of the far far tertiary markets is risky at this point.”