Deal Size
$80.0M
Cap Rate
Est. 9.00%
$/SF
—
Size
—
Occupancy
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The deal for 111 W. Ocean Blvd. is priced at a 9.00% cap rate, which is significantly higher than typical cap rates for office properties in the Los Angeles/Long Beach market, indicating elevated risk. The lack of disclosed occupancy and WALT raises concerns about the property's current cash flow stability and tenant quality. Furthermore, the recent trend of converting office spaces to housing, as noted with the buyer's previous acquisition for $50 million, suggests a potential oversupply in the office sector, further complicating the investment outlook.
Izek Shomof appears to be pursuing a value-add strategy, evidenced by the previous acquisition of the property for $50 million and the intent to convert it to housing. This aligns with broader market trends, but also indicates a speculative approach given current market conditions.
The seller's motivation remains undisclosed, but the transaction could indicate a strategic exit from the office sector amidst declining demand and rising conversion trends.
This deal reflects a broader trend in the market where office properties are increasingly being repurposed for residential use, signaling a potential oversupply in the office sector. The high cap rate suggests that investors are cautious, and this could be a leading indicator of further declines in office property values.
Izek Shomof
Long Beach has seen a modest population growth, with a current population of approximately 470,000. The median household income is around $70,000, indicating a diverse economic base. However, the region faces challenges with rising living costs, which may impact demand for office space.
The competitive set includes several office buildings in downtown Long Beach, with recent transactions indicating cap rates between 6.50% to 8.00%. The conversion of office spaces to residential units, as seen with this property, highlights a shift in demand that could further impact existing office assets.
There is a notable pipeline of new residential developments in downtown Long Beach, with over 1,000 units planned or under construction, which could further saturate the market and reduce demand for existing office space.
The 9.00% cap rate for this deal is significantly above the market average for office properties in Los Angeles, which typically ranges from 6.50% to 8.00%. This higher cap rate suggests that the market is pricing in increased risk due to potential vacancy and the ongoing shift towards residential conversions.
Recent trends indicate a stagnation in office rents in Long Beach, with average asking rents around $3.00 per square foot. The anticipated conversion of office space to residential may further suppress rent growth in the office sector.
The property may present a value-add opportunity through repositioning, particularly if the buyer can successfully convert the office space to residential use. However, the current lack of occupancy and tenant information complicates this potential.
The tenant mix is unknown, but the lack of disclosed occupancy suggests potential single-tenant risk, which would be a significant concern for future cash flow stability.
High vacancy rates in the office sector due to the ongoing shift to remote work and conversions to residential.
HighThe buyer should conduct a comprehensive market analysis to identify potential tenant demand and explore partnerships with residential developers to facilitate a successful conversion.
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