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The Real Deal Los Angeles

Expected returns drop for LA real estate

Amid softening market, multifamily rates sat at historic lows in 2018
By Gregory Cornfield | March 04, 2019 05:00PM

Greater Los Angeles is seeing some of the largest decreases in cap rates (Credit: Wikimedia)

Amid a cooling real estate market, Los Angeles is seeing some of the sharpest decreases in expected rates of return across multiple markets.

Job growth and tax cuts led to stable rates for investment throughout the country last year, but L.A.’s expected returns dropped, according to research by CBRE. Multifamily cap rates remained at historic lows in the second half of 2018.

Most Southern California markets posted cap rates at sub-5 percent for Class A infill, including Los Angeles, Orange County and San Diego.

Capitalization rates are expect to remain stable in the first half of 2019. But high demand for industrial space — driven largely by e-commerce firms — kept rates in Southern California among the lowest in the country.

Orange County came in fourth place, Los Angeles came in sixth, and the Inland Empire came in seventh place in CBRE’s list. Last year’s biggest industrial leases clustered in leading logistics hubs, with the Inland Empire topping the list.

Orange County came in fourth and Los Angeles in fifth for Class A office properties located in central business district, featuring cap rates between 4.5 percent to 5.5 percent, following San Francisco, New York City and Seattle.

L.A.-based CBRE executive vice president, Todd Tydlaska, said Los Angeles and Orange County remain the top target markets for capital for the fourth year in a row.

Hotel cap rates were mostly stable in the second half of 2018, but luxury hotel cap rates were the lowest in Los Angeles, Orange County and Boston at around 6.8 percent.

Retail cap rates increased for all segments in the second half of 2018. But shopping centers in affluent suburban communities in Orange County and Los Angeles posted the lowest cap rates in the nation at 4.9 percent.

High street retail in L.A. featured the second-lowest rates in the country at 4.1 percent, following San Francisco. Patrick Wade, a CBRE senior vice president, said buyers and lenders are becoming more conservative in their underwriting assumptions and expecting higher yield due to more supply on the market.

“Prime L.A. County submarkets such as the beach cities, West L.A., West Hollywood, Santa Monica, Studio City and Silver Lake, among others, continue to see the strongest rent appreciation and tenant-investor demand,” Wade said.