Earlier this month, The Mogharebi Group (TMG) arranged a relatively small transaction: the $12.2 million sale of The Wilson Townhomes, a 24-unit development in the community of Costa Mesa, Co. ‘Orange. The buyer of the fully occupied property is a private investment group from nearby Newport Coast.

Built in 1961, The Wilson Townhomes sits on a two-acre, low-density site bordering both Newport Beach and Huntington Beach. Each of the two-bedroom apartments is located in six two-storey residential buildings.

But look a little closer and you can see that the sale of The Wilson Townhomes is more than just a routine transaction. It also illustrates how expensive investments, even medium ones, have become. Indeed, given the lack of supply of affordable single-family homes and strong overall demand for apartments, paying just over half a million dollars per unit for a 61-year-old apartment community in the county of Orange, Calif., makes perfect sense in the 2022 market.

Here’s how.

A long-term bet in a tight market

Eli Randel, chief strategy officer at CREXi, says this sale appears to be a long-term bet in a tight market poised for continued growth in rental rates and long-term value.

“While the initial cap rate likely offered a modest return, the deal likely offered attractive financing options, was a mouthful that brings in a large pool of buyers and provides a safe place to park pent-up capital in times of crisis. uncertainty,” says Randel. .

“Transactions like this during a period of growing rental rates, in a punishing cash environment given inflation, and when other investment vehicles are feeling unstable makes a lot of sense.”

According to TMG research, 224 multi-family units are planned for Costa Mesa over the next five years, well below the projected 810 new households formed during the same period. This is something that is generally indicative of many parts of the country.

Kimberly Stepp is a director at Stepp Commercial, a multi-family brokerage firm. Stepp focuses on the West Los Angeles/Santa Monica market. She says prices for both new and old assets have risen significantly in recent months and coastal properties in general warrant premium prices.

“Investors are looking to capture opportunities to own property in coastal markets and can justify a unit price of over $500,000 for older assets due to tight inventory and rising rental rates in the choice areas. In the Santa Monica market, we see unit prices in the $500,000 to $550,000 range and cap rates hovering around 3%,” says Stepp.

31% increase per unit over one year

Wilson Townhomes sale price of over $508,000 per unit represents a 31% increase from last year’s median unit price of $386,236, and speaks to growing investor appetite for the assets multifamily in the area.

According to PwC and Urban Land Institute “Emerging Trends in Real Estate 2022”, Orange County ranked fourth nationally in favor of multi-family investments.

“Many households are locked out of the housing for sale market in Orange County with median home prices exceeding $1.15 million and yet the supply of multifamily housing has simply not caught up with demand,” said TMG Senior Vice President Brett Bayless.

Rental demand in Costa Mesa has been strong for decades and given the current high 98% occupancy rate, expected household formation and lack of new supply, it is very likely that demand will remain extremely strong in a foreseeable future. As a result, we received several offers from a variety of investors.

Michael Busenhart, vice president of real estate at Archer, said the dollar-per-unit increase is in line with rising prices in Costa Mesa, as year-over-year home values ​​in Costa Mesa have risen. increased by 25.6% with a median price. of $1,190,060, according to Zillow.

“The barrier to entry for new home buyers is extremely high in this market, which will increase demand and prices for tenants in the market,” Busenhart said.

This purchase at $508,000 per unit represents a substantial discount to current home values ​​on the market. Archer’s automated underwriting software estimated a market price of $12 million, a cap of around 3.7% on income in place. This market pricing reflects recent trends with cap rates compressing into the 3% range.

Additionally, buying a $1.19 million home requires a down payment of $240,000 for 20% and about $5,700 in monthly payments. The average rent of $2,000 for comps is a significant difference from homeownership, highlighting the growing difficulty of homeownership and the increased demand for rental properties.