Q&A with Kimberly Stepp

“Cap Rates Hit New Lows On Westside”

“A recent apartment sale in Venice breaks a new cap rate record, coming in at an astounding .7%.”

It seems to be the deal that everyone is talking about. Venice Beach Apartments, a fully occupied five-unit apartment complex, traded hands in Venice at an astounding .7% cap rate—the lowest cap rate on record in the nation, according to CoStar. Kimberly R. Stepp, principal with Stepp Commercial, represented the seller and the buyer in the deal. We sat down with Stepp to talk about the transaction and get her take on what this means for the Westside market. You recently completed the lowest cap rate for an apartment property ever, how did you justify it from a pricing standpoint?

Kimberly R. Stepp: Considering where Venice Beach properties are trading on a per-square-foot and per-unit basis, along with the facts that this asset is a mere 300 feet from Venice Beach and its rents were severely depressed, the pricing was justified. The sophisticated buyer also saw opportunity to add value immediately as he negotiated high dollar buyouts of two tenants after closing, so this acquisition worked out quite well for him. With your focus being on LA’s Westside how do you advise sellers and buyers when it comes to rent control?

Stepp: Most buyers in rent-controlled areas plan to hold long-term.  With rent control, rental rate increases are usually about 2% per year, generally speaking, and within seven to 10 years, properties naturally shed some tenants. Also, regardless of rent control, the appreciation rates in prime locations have their advantages over time. Overall, rent-controlled areas are great investments due to tax shelter, appreciation and the potential to buyout willing tenants. What are your thoughts on the apartment investment market in West L.A. right now?

Stepp: The West Los Angeles apartment market continues to be one of the hottest in Southern California, especially as you approach the beach.  As a result of the past couple of years of aggressive pricing and appreciation, we have recently noticed a turn in pricing and a pushback from buyers on the aggressive numbers seen in recent years.

The good news for investors is that there are still pockets of opportunity in emerging West LA submarkets that are gaining momentum in terms of growth and value-add investment. One to note in particular is the Palms/Mar Vista neighborhood. This well-located mini-market is proving to be a solid opportunistic play for a buyer as the area sees redevelopment capital being invested as well as new construction occurring. How do you advise buyers looking for small- to mid-sized apartment assets on the Westside?

Stepp: For buyers looking for apartment deals we advise that they have a general knowledge of location and where properties in their budget are trading.  If a buyer is looking for yield, then it is important to be more open-minded in terms of location.  If a buyer is looking for a long-term hold then they are typically more comfortable with lower initial income in return for a more prime location and the promise of upside over time.

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