LA's apartment market is so hot, even a building that's 42% vacant with zero cash flow can find a buyer like Lion Real Estate Group, which snapped up the 60unit Sherman Apartments with plans to renovate the Koreatown property for urban professionals. The property traded at a 1.34% cap rate on inplace rents.
Both sides were represented by Iconic Investments' Peter Strauss, who tells us the biggest hurdle wasn't the building's vacancy but rather the extensive work required. The buyer needs to gut 23 units down to the studs and put in all new systems: plumbing, electrical, roofing. "This wasn't just an apartment building with a large number of vacancies. This was literally a construction project." Every major buyer in LA looked at the property, he says. "We had over 20 property tours that yielded seven offers, and led to a bestandfinal pool of three buyers." Lion, which owns and operates more than 600 units in LA, plans to spend $1.2M on improvements in order to reposition the property to appeal to young urban professionals. Rents average $650 to $750 for a studio unit, likely increasing to the $1,095 to $1,195 range after everything's done, but he expects it will be six to 12 months before the buyers see any cash flow.
Sherman Apartments' seller, a Commerce based private investor, owned the building for more than 40 years. The property was built in 1926 and is near three Metro stations in a gentrifying area of Koreatown, Peter says. He's seeing large numbers of people relocate to LA from New York and Boston for work, and these folks are accustomed to riding the subway. “To live in Koreatown just feels right, and they get these beautiful 1920s properties similar to what they had back east.” Peter's family includes wife Paula, son Ethan, and the newest addition: onemonthold daughter Ruby.