October 2023

Market Update – Focus California:

As fourth quarter begins, macro-economic market conditions remain uncertain as predictions vacillate between soft-landing and recession depending on the data point of the day. Two sets of factors, interest rates surging to a 16 year high, coupled with a supply constrained inventory of single-family homes as homeowners hold onto their low interest rate mortgages, are favorable for multi-family investors. The affordability gap (the difference between an average rent in a market and the average cost of a mortgage on an average home price in that market) continues to widen, leading to a larger renter population, who are generally staying longer in apartments, and in constrained new development locations, rising rents due to this demand.

As noted in the Green Street chart below, two of Apartment Ventures’ core markets – Los Angeles and Orange County are in the Top 10 Markets by Inventory Value largely based on these factors.

Conversely, the lack of housing affordability in all housing categories has become highly politicalized leading into an election year with a number of local and national initiatives being introduced. Many of the initiatives are focused on expanded rent control and tenant rights. We closely monitor these initiatives through our partnerships with the state and national apartment association advocacy groups, contribute to the PACs to combat onerous legislation, and sit on subcommittees whenever possible. Our association representatives are heavily focused on finding solutions to the real issue – housing shortage – by introducing zoning modifications and other incentives to encourage new development to close the gap on the +/-3 million unit housing shortage. It is very difficult to predict the outcome of government interference in free markets, however we believe that the demand and needs continue to support investing and owning in these important and large markets.

Operations:

Third quarter results reported steady occupancy in the California and Arizona markets and a softening in the Las Vegas market as new inventory came online, including additional competition from single family rentals. All markets had modest increases in rents quarter over quarter. Operating expenses continue to increase but market research suggests that the peak increases for materials have been absorbed as supply chain constraints have normalized while labor, utility and insurance costs remain under pressure.

2024 Planning & Budgeting:

Fourth Quarter has begun and Apartment Ventures’ 2024 budget season is in full swing in our Fusion Property Management affiliate. As we prepare for 2024, there are a number of research tools we use to evaluate external market trends such as Moody’s Analytics and Green Street along with our local market surveys for real time feedback.

Additionally, as a tax advantaged invest, it is important that we partner with our CPA and cost segregation firms to maximize the many tax benefits afforded to our investors from acquisition through to disposition. Annually we review current and proposed changes to tax law and discuss potential impact to make the most of the allowed tax laws – for example, accelerated depreciation that generates losses to offset your cash flow typically resulting in little to no taxes, capital gains treatment upon disposition with opportunities to defer the gain utilizing 1031 exchanges.

We will provide a complete 2024 budget overview and recap of any proposed tax law changes as part of our Q4 investor letter.

Final Words:

As we’ve stated before, uncertain times in the broader economy and CRE often leads to opportunities for astute investors. We continue to seek these opportunities with care and diligence.

We appreciate and thank you for your investment with Apartment Ventures and are hoping to see you at our upcoming Open House. Until then, please feel free to contact the partners with any questions, concerns or market observations.

 

Your investment account and operating information for your investments are posted quarterly and are available in our Investor Portal at: https://investors.appfolioim.com/apartmentventures/investor/login

Best,

John, Lee and Kari

www.apartmentventures.com

T: 714.379.9900