Buyers beware

The math underlying the apartment repositioning business is simple: It comes down to the relationship between the price at which we can buy buildings and the rent we can achieve for renovated units.

Because we started doing this pretty much at the bottom of the last recession, for our entire career, both prices and rents have been rising.

Opportunity for us arises when achievable rents in a given neighborhood accelerate past asking prices for buildings, allowing us to swoop in and make deals.

Sometimes, like in 2012-2015, rents run way out ahead in a bunch of neighborhoods and there are a lot of deals to do.

But, pretty rapidly, buyers see the opportunity and rush in to buy buildings in the affected neighborhoods, pushing prices up far enough to shut off the opportunities for us.

So far, by being vigilant, we have been able to stay ahead of the crowd, finding new neighborhoods in which to buy.

However, all along I’ve been saying to anyone unlucky enough to get stuck next to me at a cocktail party that there would come a day when no neighborhoods work. In other words, a point at which buyer demand for apartment buildings is so strong as to detach prices from the cashflows they are capable of generating.

I believe this has occurred in Los Angeles over the past six months or so.

Over the next few days, I’ll discuss how we’re dealing with this uncooperative market.

But the message for now is: Right now, buyers should beware.