We’re currently seeing lower returns for value-add opportunities, where we would be needing to take more risk, in comparison to higher returns for stabilized properties. This is due to there being so much demand for creating value in apartments in Los Angeles.
Properties are getting priced to lower returns than finished, fully occupied and fully leased properties are. We just came across this in securing a high value-add property next door to a brand new property. Both of them were up for sale. We did the financial analysis for both and concluded that the completed, stabilized property had a higher return at a lower risk, compared to the value-add property.
By the time you would have spent all of the money on renovation costs, the value-add property became the same price as the brand new building next door, which is already generating a higher return, for lower risk.
This is the dislocation right now in LA apartment investing.