Westside buyers are typically not assessing a building on its current cash flows but are looking at its: 1) future development potential; 2) future market rents; or, 3) value as an owner-user opportunity.
Below we’ll look at an example that sold during the 1st Quarter of 2009 from each of these categories.
1) 430 - 506 Pico Boulevard, Santa Monica – Development OpportunityThese five contiguous lots near the corner of Pico and 4th in Santa Monica total almost 25,000 sq ft, are delivered vacant, and are zoned for redevelopment. Asking price was $5.8 million. Sale price was $4.5 million. Sale time 117 days.
These units are sold for land value. In spite of the jitters in the commercial real estate market, a developer is seeing an upside by buying in this area.
2) 209 Venice Boulevard, Venice – Capture Upside in Rents
This 10-unit non-rent-controlled building located a few blocks from the beach sold for $3.8 million, close to its $4.125 million asking price, in 24 days. With 12,279 sq ft of living area, units, on average, are over 1,200 sq ft and come with two parking spaces. Gross rent is $282,000, yielding a GRM (Gross Rent Multiplier) of 13.5.
Although the building is advertised as having an upside rent potential of 17%, the building is trading at a 30 – 35% premium to properties in Hollywood or Silver Lake / Echo Park, where comparable buildings are trading at a GRM of approximately 10.
3) 2137 20th Street, Santa Monica - Owner-User Opportunity
2137 20th Street sold for $1.5 million, below its $1.7 million asking price. This 6-unit compound is essentially a 3 bedroom, 2.5 bath house on the same parcel as five rental units generating on average $1,500/month. The owner benefits from a heavily subsidized mortgage payment but most bear the cost of owning and operating a 5-unit income property at his doorstep.
During the boom, cap rates for “bread and butter” income properties (say in Santa Monica) were compressed to as low as 3.5% as investors saw future value in properties and were willing to forgo income in the present in order to obtain these returns.
Values may have declined from these heady days, but the Westside Premium is still very much in play. One may ask, why are investors willing to pay such a premium to own Westside property? The answer is twofold.
The first can be attributed to “availability bias”: buyers tend to buy (and to overvalue) what is most familiar to them. Investors who live on the Westside know the Westside and buy on the Westside.
The second is experience: these buyers invested on the Westside, yielded outsized returns, and are looking for a repeat performance. During past real estate cycles, property close to the beach proved to be gold – and there is no reason to expect the trend to change.
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