Some thoughts on the New Year

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Just getting back to the office after a wonderful break and thought I’d take the opportunity to offer some thoughts and make some predictions on the LA market in 2015.

Here they are, in no particular order:

1. Interest rates will rise, but prices won’t fall. Classic real estate finance math clearly shows that, all things being equal, increases in interest rates ought to lead to decreases in the price of income producing real estate. So, given that the Fed is sure to increase rates this year, you’d think that prices would fall. But they won’t because the economy is improving and people are more and more confident (and, therefore, risk accepting).

2. Rent growth will slow, particularly Downtown and in Hollywood and Glendale. All of these submarkets have absorbed a ton of product over the past year, with a lot more coming on-line in 2015. That will shift some power from landlords (who have dominated the market the last 2-3 years) back towards tenants.

3. LA will do something about AirBnB. It’s way too easy to clear out a big apartment building using the Ellis Act and then rent it on AirBnB like a hotel. There’s no way the city can allow people to operate big, unlicensed hotels. So, expect the city to step in with some regulation to limit the number of units that can be let on a short-term basis in one building.

4. The professionals will mostly cede the house-flipping business to amateurs (except at the high end). There’s no real embedded profit in any flip deal these days (eg the net exit price achievable for the post-renovation property on the day of entry does not exceed the cost of buying and renovating). The “investors” who are “making money” are really getting lucky, in that increases in the market price during the rehab period are bailing them out. These are bad deals and people should avoid them.

5. Condos will come roaring back. Condo deals have been out of favor since the bust, partially because people got burned on them and partially because the demand for yield in a low-interest rate environment led developers to build apartments instead. But the price per sq ft on single family homes in desirable areas is up enough to justify building condos, so people will build them.

At the end of the year, we’ll check back and see how I did. Meanwhile, I’m back in the saddle and ready to make A LOT of deals this year.

Stick around and hopefully we’ll all learn something together.

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