The past 24 months have been marked by a high level of uncertainty. Many factors have been at play, floating around without clarity to ground them and create a better idea of how the game is being played at this moment. When there's a period of higher uncertainty, risk also tends to be higher because the market is less predictable. When that happens, there tends to be a drop in the number of people buying and selling within that market. For real estate, much of this was driven by:
- Higher interest rates for an extended period
- A potential recession
- Geopolitical tensions
- A polarized election
- Possibility of stricter rent control for certain cities in California
- Insurance premium chaos
This was all a perfect storm that led to a drop in real estate transactions and pricing. During this time of uncertainty, many have been in a wait and see pattern until the dust began to settle. Now, we are much closer to the dust settling for some of these factors, but even as that dust settles, there are more questions with the answers remaining unclear.
Interest Rates - As quickly as we saw interest rates drop from ~7% down to ~5.75%, they have risen back to over 6% in the month of October. We thought we were trending down for months to come, but the 5 and 10 year treasuries rose over 50 basis points in a span of 3 weeks. The Fed has been dropping the Fed Funds Rate, 0.75% total over their past 2 Fed meetings, which helps borrowers with debt that floats on a spread over WSJ Prime, but traditional bank rates remain high with only hopes that they drop as we expect them to.
Election - The Presidential Election has been finalized and President Trump will be in office next year for his second term. We have seen the stock market respond very positively over the past week and many believe this will be good for the economy, but we will need to see continued 2-3% inflation levels and trending lower interest rates to know if the economic result is positive. How the election results will affect the US internally and the wars in Russia and the Middle East remain unknown until he takes office and we get closer to resolutions.
Rent Control in CA - Prop 33, which would have repealed Costa Hawkins and allowed cities to redefine their rent control laws, lost by a huge margin. Rent control will remain as-is and although rent control has its own hurdles, at least the rules of the game as we know them are still the rules we will play by.
It has been an uncertain time, full of many unknowns which has led to TGG, and many others, to steer clear of unnecessary risks. The key to maneuvering in this market is to figure out how to mitigate risk on existing portfolios through better operation strategies and on new purchases through price adjustments or having a higher likelihood of executing business plans.
TGG has been focused on optimizing building operations for its existing portfolio. Specifically, working on tenant retention, improved building maintenance and strategic renovations. We recently purchased an 8 unit apartment building in an amazing submarket of Los Angeles, where the previous owner of 50+ years was able to deliver 7 of those units vacant at the close of escrow. We will continue to find ways to improve how we run our current portfolio and grow it by buying properties that fit our investment criteria. We are optimistic in the years to come and will continue to grow our portfolio in Los Angeles as it remains one of the most desired places to live with a high percentage of the population renting apartments.
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