Redlands Pl, Costa Mesa: We are in the process of doing a 2-unit small lot, a for-sale subdivision in Costa Mesa, and after almost nine months of work, we finally received a 7-0 approval from the City Planning Commission . We still have +12 months until we can put a shovel in the ground. To generate some yield in the meantime, we are doing short-term (+30 day) furnished rentals in one of the existing units and renting out some additional space for storage.
Placentia Ave, Costa Mesa: After almost 2.5 years of design, permitting and construction we are nearing completion of our first set of accessory dwelling units (ADUs) on a multifamily project. We have 6 more ADUs in various design, permitting, or construction stages. We like to classify these ADUs as NOAH or Naturally Occurring Affordable Housing, as the market rental rate will be naturally much lower than most new construction multifamily within the same local. While these projects provide much-needed housing for the "missing middle" the risk-adjusted returns they provide are very attractive as there is informational arbitrage, as most property sellers do not put much, if any value on the additional land. This particular property was acquired with no additional value attributed to the land, meaning the incremental basis for these units is limited to its construction cost, which was about $225K per unit. Each unit will rent for approximately $2,800 each month, which would generate a 15% annual return on investment.
What's The Good Word
The dramatic rise in home prices and rental rates across the country has been the talk of the town.
But who is to blame? Developers' and investor greed has often been the scapegoat of choice. The Atlantic article does an excellent job of dispelling the "greedy landlord" trope.
There are many factors, including, to some degree, greed, but some more impactful contributors include inflationary fiscal and monetary policy and increased supply constraints (exacerbated by COVID policy). We must progress toward a solution before we can honestly discuss the root causes of affordability issues.
Something Smart from Someone Smart
Interest rates have increased, and real estate in the public market has been repriced. Last year, REIT asset prices decreased by about 20%, with a wide range between sectors. The private real estate market hasn’t quite gotten the memo yet. NCREIF’s appraisal-based NPI index says that real estate values increased by 4% in 2022 and are only down slightly from the peak in 3Q22. History has shown that during periods of inflection, the large, liquid publicly traded REIT market provides a good betting line for the direction and magnitude of future price changes for privately held commercial real estate.
Senior Associate at Green Street
Fooled By Randomness by Nassim Taleb and the books that followed (The Black Swan and Antifragile) have greatly impacted my approach to risk/investing. The author is one of the most intelligent & insufferable humans on the planet. However, if you can tolerate the author, you will come away better for it.
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