A Big earthquake could trigger series of large earthquakes, study finds

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New research released Wednesday suggests that the shaking from “the Big One,” the long-predicted major earthquake on the San Andreas fault, could trigger additional large temblors on nearby faults, intensifying the overall seismic impact.

The study suggests that such a quake “could presage a flurry of ‘other Big Ones’ on other faults,” said USC earth sciences professor James Dolan, “as stresses related to the original San Andreas fault earthquake are redistributed on other faults throughout Southern California.”
The study, presented by Dolan at a meeting of the Seismological Society of America in Pasadena, focuses on whether earthquakes are generated in “super cycles.” A super cycle refers to when a large number of quakes rupture on a single fault system in a relatively short period of time in seismic terms, over a matter of decades or a few centuries.

The concept of more than one Big One in a lifetime might feel outlandish to Californians today. But it wasn’t so long ago when this state had more powerful earthquakes more frequently. The San Andreas fault, for example, suffered two major ruptures in the 19th century: a quake of about magnitude 7.5 in 1812 and a much worse, 7.9 temblor in 1857.

The San Andreas fault in Southern California has been quiet since. And the region hasn’t had a true Big One — a quake greater than 7.7 — since 1857.

“This period of relative seismic quietude, during which we have been releasing in earthquakes far less energy than we have been storing from relative tectonic plate motions, cannot last forever,” Dolan said. “At some point, we will need to start releasing all of this pent-up energy stored in the rocks in a series of large earthquakes.”

To better understand where quakes happen and when they hit, Dolan and his colleagues focused on Southern California’s second largest fault, the Garlock fault, which stretches along the northern edge of the Mojave Desert and intersects the San Andreas. Previous studies showed that between AD 250 and 1550, the Garlock fault produced four large earthquakes, probably between magnitudes 7.5 and 7.7.

But there were periods of quiet. One lasted about 3,500 years before the year 250. A new quiet period began after 1550; the Garlock fault has not had quakes large enough to break the surface in nearly half a millennium.
Dolan and his team found that during its active time, the Garlock fault was moving nearly 20 millimeters a year. That’s much faster than the long-term annual average of that fault, between 5 millimeters to 7.5 millimeters.
The calculations show how earthquake faults can essentially stop moving for thousands of years, and then go into a relatively hyperactive super cycle, unleashing seismic strain.

The results of this study can be applied to other faults, Dolan said. “We’re not focused especially on the seismic threat posed by the Garlock,” he said. “This study focuses on the deeper scientific significance, the more general importance of how faults interact with one another over long time and distance scales, and fundamentally on helping us to understand how faults store and release energy.
“These are issues of absolutely basic importance for our understanding of seismic threats from all faults,” Dolan said.

The Garlock fault happened to be a good example to focus on because of the presence of data that show both the timing of prehistoric temblors and the rate at which the fault stores up seismic stress and releases energy through earthquakes.

Will interest rates rise?

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A low interest rate environment typically results in higher—and often inflated—asset values, so some markets across the country are at risk for volatility if interest rates rise.

Although there are many ways that investors can differentiate themselves, a couple things certainly stand out. First, all-cash investors (who use no debt to purchase a deal) will often be preferred over buyers who need debt because a loan requirement brings additional buy-side risk to the table. Hence, some buyers have worked to purchase properties on an all-cash basis and then apply debt to the property post-closing. Second, taking a pro-active approach prior to escrow and offering sellers a shorter closing timeframe—particularly the buyer’s due-diligence period—is a strong selling point.

We may see continued cap-rate compression if supply of good assets in prime, coastal regions stays low, as capital will spill over into secondary and tertiary product and markets because it is searching for yield. Plentiful capital, combined with limited supply will continue to flood the market and lead to a breakdown in investment discipline, meaning that many investors will be more willing to take on additional risk in exchange for lesser yields. A low-interest-rate environment typically results in higher—and often inflated—asset values, so we may see some bubbles pop in various markets across the nation if interest rates shift up substantially.

The net-lease sector will only grow in appeal, since more and more capital will be allocated into hard assets that provide for no management responsibilities. From a leasing standpoint, I believe landlords may work to structure leases in a net-lease format in order to drive higher back-end value, but it will also depend on whether a tenant is set up to handle a net-lease management structure. Moreover, a tenant may negotiate more aggressively with owners who seek a net-lease format vs. a gross-lease format, potentially leading to relatively lower rents in exchange for limited management responsibilities.

You will see increasing consolidation at the institutional level, whereby corporations are leveraging relatively cheap capital markets to purchase larger portfolios or companies with holdings of a particular asset type. Additionally, debt is plentiful and is becoming more and more aggressive, thereby opening opportunities for newer buyers to purchase commercial property. In many cases, these buyers are paying a premium and using the debt to stretch in order to buy a deal.

$47M Value-Add Buy

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Pendo Investments has purchased a three-property multifamily portfolio totaling 222 units for $46.5 million, an average per-unit price of $209,500. The investor plans to invest an additional $12,000 per unit to upgrade the properties and bring the rents up to market rate.

The three properties are a 111-unit 1970s vintage complex in Garden Grove, a 95-unit 1970s vintage complex in Downey, and a 16-unit 2006 vintage complex in Bellflower, CA. The investor will upgrade each of the interior units, so that the property can compete at the top of the market.

The investor owns a total of nine other properties within a 10-mile radius of each of these properties, including two multifamily properties in Downey that they purchased late last year for nearly $25 million. Once the renovations are complete and lease-ups begin, they plan to resell the properties. Pendo Investments purchased the properties with bank loans provided by Chase.

Multifamily Market Adds $63B to Local Economy

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The multifamily market has contributed $63.1 billion annually to the local Los Angeles economy, according to a recent National Apartment Association survey analyzing data from 2013. The survey shows that apartment industry, including construction, operations and resident spending, has generated billions of dollars as well as 534,900 jobs. This is more than any other metropolitan area in the US.

AAGLA did a survey last year that showed results, but this is probably surprising for some people who don’t understand how important the multifamily communities are to metropolitan areas as a whole.

Apartment construction generated $5 billion alone, while apartment operations contributed $11 billion. Renter spending from these apartment complexes generated the most for the local economy, a total of $47.1 billion. The report looked at 40 individual markets as well as the national markets. The apartment community generated $139.1 billion and supported 1.3 million jobs for the California state economy.
Although this is good news, it is important to remember that demand for apartments is still high and vacancy rates are at all-time lows, meaning there is still more to do. We are in a housing crisis and there is really no place to go but up. This number is going to grow more and more, especially as the economy turns around. Downtown Los Angeles has the most multifamily development in the market, and that they are still catching up to the growing demand.

From a national perspective, the apartment industry has generated $1.3 trillion for the global economy, and 12.3 million jobs. These numbers, as well as the boom in the local L.A. economy, show that the multifamily sector was the strongest commercial real estate class out of the recession.

The Massive Greystar-Riverstone Integration

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In some ways, the Greystar–Riverstone marriage was rooted in the same family tree.

While June’s landmark deal between the country’s top two apartment managers sent the industry rumor mill buzzing with talk of an almost 400,000-unit management ¬colossus with tentacles reaching into every major market, one of the ¬under-the-radar aspects of the merger was the intellectual capital involved.

Bob Faith, CEO of Charleston, S.C.–based Greystar, had worked with key members of Riverstone’s executive team at Trammell Crow before leaving to build his own empire. And he admired their ability to develop talent.
“It’s just really about having the highest quality of people,” Faith says. “One of the hardest things we do is to find highly motivated, intelligent people. This deal brings together two great groups of folks, and that’s ¬really what we believe it’s all about.”

Now, the hard part begins—unifying all of that talent together under one large umbrella.

Terry Danner is proud of the team he built at Riverstone. He established the firm in 2006 by buying out Trammell Crow Residential Services with Riverstone’s other founder, Christy Freeland. Freeland retired as chairman of the company in 2010 and Danner became CEO last year.

And Danner never stopped building that team. Riverstone has sharpened its focus on recruiting the best and brightest over the past year, hiring several recruiting managers and launching a comprehensive outreach effort to sell the company’s opportunities to a new wave of young professionals.

“I think there are so many bright kids coming out of school,” Danner told MFE earlier this year. “And our industry is poised to be a great place for those kids. So, last year, we hired three recruiters. And we’re going to try and bring more young talent into this industry.

Approximately 4,700 Riverstone employees were set to join the Greystar team, which stood at approximately 5,900 staff members nationwide, when the sale closed on June 4. As Riverstone’s foot soldiers move under the Greystar tent, Danner is accelerating the transition process by leading team and group sessions across the country.
As of early July, Danner was in the midst of visiting and meeting with associates, city by city, to foster collaboration and programming to promote cohesive company culture.

“Company culture is one of those things that may be best learned through experience and interactions with other team members and the leaders of the company,” Danner said in an e-mail. “We’ve been conducting joint town-hall meetings across the country to discuss the integration with team members in a personalized and intimate setting. This has given team members a chance to meet one another, and has given us an opportunity to introduce ourselves in person, discuss our shared vision and the integration process, and field questions.”

Andrew Livingstone, Greystar’s executive managing director of real estate, is the point man at his company for the integration. A 20-year industry veteran and 15-year Greystar staffer, Livingstone is up to the task after playing a prominent role in establishing Greystar’s long-term strategic direction.

In fact, Livingstone led the integration efforts following the company’s acquisition of JPI Property Management Co. in 2009 and the Archon and Glacier portfolios in 2010. He’s even gone international, ¬supervising the establishment of Greystar’s operations in both the ¬United Kingdom and Mexico.

Livingstone says the goal is to make the transition as seamless as possible for everyone involved, which includes about 120 of ¬Riverstone’s regional managers.

“During the transition period, most existing programs, policies, and business processes that are in place at Greystar and Riverstone will continue as is,” he said in an e-mail. “This provides for continuation of our business while the integration teams collaborate to understand and compare our respective operations, explore best and market-leading practices, and establish processes for the combined companies.”

Though Greystar had a national platform to begin with, the acquisition of Riverstone provides the firm much more depth in several key markets, such as Seattle; Portland, Ore.; and parts of California. ¬But blending two cultures will be a challenge.

“Fortunately, this is a competency that both companies have honed over the years,” Livingstone says. “We both have established integration practices, tools, and subject-matter experts who have performed these tasks before, in taking on new management assignments and property portfolios, and integrating smaller management companies.”

Addressing operations has been the most immediate task in the initial integration effort. As soon as the sale was made public, the company assembled “joint integration teams,” based on areas of expertise, to help bridge the divide between the different staffs and get everyone on the same page.

“Over the coming months, these teams will continue to meet regularly to develop strategies for a smooth integration,” Livingstone says. “While it will be challenging, the rewards that come from our combined organizational knowledge, expertise, and greater efficiency will make it well worth the effort.”

Greystar hopes to be fully integrated by the end of the year. Danner will continue as Riverstone CEO through the integration. Then, once the company’s ultimate structure is determined, his leadership role will become more defined, according to Greystar.

While Danner and Livingstone have undoubtedly answered important questions about the transition for anxious employees, the ramifications of the Greystar–Riverstone union are still up in the air for both competitors and clients.

Publicly, Riverstone’s clients have remained tight-lipped about news of the sale.
As CEO of Dallas-based Pinnacle, the fourth-¬largest manager in the apartment space, Rick Graf may feel the ramifications of the sale as much as anyone.

“Many of our clients are shared clients with Greystar and Riverstone,” Graf said on the day the transaction was announced. “My phone is blowing up, as you can imagine, with people in the industry wondering what’s the deal.”

Graf’s clients aren’t alone in wondering about the marriage of the two multifamily giants. Some managers wonder how much Greystar paid for Riverstone, thinking it could set a new benchmark in pricing.

Traditionally, apartment management firms have been valued at two to four times their EBITDA earnings before interest, taxes, depreciation, and amortization, but this deal could change that calculation.

“Not that we’re for sale, but if someone would come along and pay six times earnings, it might get interesting,” said one apartment manager who preferred to remain anonymous.
For those that aren’t thinking about selling any time soon, the more pressing matter is competition. In the end, there are more questions than answers about the newly announced merger of the industry’s two biggest managers.

“Will it change the landscape?” Graf asks. “Obviously. But, what will it mean? How will it shake out? Time will tell.”

While the nearly 400,000-unit Greystar–Riverstone colossus could, on the surface, create problems for both national and regional property managers, those competitors publicly say the merger will create ¬opportunities.

“We at Laramar Group, based in Chicago always sold David against Goliath,” says Dave Woodward, now president of New York–based property management firm CompassRock Real Estate. “My gut reaction is this helps do that.”

Back in the late ’90s, after a period of initial public offerings and mergers and acquisitions, several companies built massive portfolios, but none approached 400,000 units, according to the National Multifamily Housing Council.

Ultimately, owners pared down these large, unruly holdings. Many wonder if Greystar will face similar challenges, with more than 390,000 units and 10,000 employees.

“You have 10,000 employees,” Graf says. “That’s a huge number of properties, employees, and relationships. I’m sure the Riverstone guys would say that one of their challenges in acquiring companies was creating culture and creating systems.”

Dennis Treadaway is confident the merger will bring more opportunities his way. Treadaway, president of Folsom, Calif.–based FPI Management, doesn’t believe bigger is always better.

“It really limits your ability to be completely flexible client by ¬client,” he says. “Greystar will need to run to create efficiency, and that might create opportunities for companies like mine.”

And while FPI does business in both affordable and market-rate product across all styles of portfolios, Treadaway believes Greystar’s best bet is with institutional clients rather than small-scale, homegrown, ¬affordable communities.

“I think Greystar will have their sweet spot, and that will be in institutional product,” Treadaway says.
In addition to business opportunities for his company, Treadaway thinks some of the current Greystar–Riverstone talent may look for other work as the integration effort exposes where employee overlap exists.

“I also think, because both companies are big and both will bring resources together, they’ll probably be consolidating some of their efforts,” Treadaway says. “So, good talent may come to the market.”

But Danner believes the past absorption of large portfolios gives Greystar the advantage. “Both companies have experienced rapid growth throughout our respective histories,” he says. “This has built a certain discipline within our organizations that is a part of our shared DNA.

“We have both become accustomed to rapid growth and understand its challenges and opportunities. While this integration may lead to some greater efficiency, it’s not about streamlining. It’s really about combining the top talent and business practices in our local markets so that we can deliver the best services to our clients and residents.”

Multi Family Sales Up 42% in January

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The apartment transaction market started 2015 off just as frenzied as it finished 2014.

In January, the sector posted $9.3 billion in sales, which was a 42% increase compared to January 2014. Both garden and mid- and high-rise sales contributed to the growth, increasing 40% and 46% year-over-year, respectively.

As sales increased, cap rates continued to fall, dropping 10 basis points to 6% in January. Both garden and mid- and high-rise cap rates fell, with garden hitting 6.2% (its lowest number since the recession) and mid and high-rise falling to 5%.

Outside of the year-over-year bump in sales, the real story might have been the increase in share by equity funds. In 2014, these funds only accounted for 9% of apartment acquisitions. In January, they captured 16% of the market on $1.5 billion in acquisitions.

Private investors accounted for 53% of volume on $4.9 billion of sales, which is down from their 62% of the market in 2014. In the four years before, private buyers only secured 51% of the market. Public buyers, who generally don’t want to employ as much leverage as private companies, lost share in 2014—falling to 9% of activity in 2014 versus 20% in 2013.

But public buyers did dominate portfolio activity, driven by the $4.3 billion Essex-BRE deal.
The public investors did differentiate themselves with respect to portfolio activity in 2014, but the figures here are really about M&A activity. Within the $10.0 billion universe of all public investor acquisitions, 65% of all activity was focused on portfolio acquisitions.

Erzalow Co. has purchased a multifamily property in Agoura Hills.

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Erzalow Co. has purchased a multifamily property in Agoura Hills, CA, previously known as Archstone Agoura Hills, from a private investor for $53 million. With 178 units, the property is the second largest multifamily property in the Agoura Hills market.

The sales team received 24 offers for the property and more than 250 registered buyers. “We got among the highest interest for this property of any property we have ever marketed. It appealed to the broadest variety of every investor type that we work with: private capital, sponsored capital and institutional capital, Between the size, which was large enough to appeal to institutions and small enough to be within reach for the larger private investors, and the age, being that it was built in the 1980s and basically un-renovated, which gave it plenty of untapped potential, it appealed to a tremendous variety of buyers.

The buyer was a private family office with headquarters very close to the subject, and they had an aggressive time period where they went non-contingent with a sizable deposit and were flexible on the closing date to meet the sellers other obligations.

The property was built in 1986 and is comprised of 11 two-story buildings on 15 acres with a mix of one-, two- and three-bedroom apartment homes. The property features a fitness and business center, a pool, spa, barbeque area and tennis courts as well as hiking trails.

The buyer will rebrand the property as Lexington Apartment Homes and plans to renovate the common areas and interior units to take advantage of rising rents in the submarket, a market condition that fueled interest in this property. Most of the properties that we are selling here are similar to this asset in that the newest leases being executed are as much as 8% to 10% higher than the leases for the same unit in the same condition 12 months earlier. You have outstanding rent growth in the absence of any capital improvement, so the thought on these 80s and 90s properties is that if someone were to roll up their sleeves and invest $10,000 per unit in upgrades, they could not only enjoy that 8% rent growth but and additional figure on top of that.

Mayor’s Earthquake Plan “Biggest Step Forward”

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Moving forward with just a few of the projects outlined in an earthquake action plan unveiled last year would be “the biggest step forward” in Los Angeles’ efforts to fortify its buildings and infrastructure against damage from violent shaking, according to the mayor’s point person on earthquakes.

The mayor’s earthquake action plan, released in December, was presented Tuesday by Los Angeles Mayor Eric Garcetti and USGS seismologist Dr. Lucy Jones at a Los Angeles Chamber of Commerce event. Jones talked about proposals for protecting the city’s buildings, water system and telecommunications infrastructure in the event of a devastating earthquake.

“Even if we only get to part of this, it’s the biggest step forward that we’ve ever seen,” said Jones. “I love LA. I was born and brought up here, and I want my grandchildren born and brought up here.

“This earthquake is absolutely inevitable. Let’s get ready for it.”

The action plan states that future earthquakes along the San Andreas Fault are expected to reach magnitude-7.8 or higher. The devastating Northridge quake was magnitude 6.7, but Los Angeles should “set a higher standard than having recovered” from the 1994 earthquake, according to the report.

Garcetti said he hopes to have ordinances passed this year that will open the door for some of the plan’s elements. Some motions regarding the plan are already being considered by the Los Angeles City Council.

The proposal also involves use of earthquake-resistant pipes, such as those installed late last year near Dignity Health Northridge Hospital Medical Center. The segmented iron pipes are designed to bend without breaking.

“Those pipes are buried,” Jones said. “Nobody wants to deal with that infrastructure they don’t have to look at.”

Elements of the 126-page “Resilience by Design” plan were unveiled in December, including measures to retrofit certain homes and concrete structures vulnerable to collapse during an earthquake. The retrofits would be required within five years at “soft first story” structures, typically wood-framed apartment buildings with weak first-floors that are built above carports.

The plan includes a seismic safety rating system that picks up where building codes leave off. Building codes are created around requirements that ensure a low probability of collapse. The ratings system would encourage building owners to make sure their buildings not only remain standing, but remain functional.

The mayor’s plan also recommends improving Internet and cellphone networks in Los Angeles by working with telecommunications companies. He also proposed creating a solar-powered, citywide wireless Internet network and fortifying cellphone towers.

Private Investor Spends $13.4 Mil on Trio of East SFV Apartment Properties

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A private investor has acquired a portfolio of three multifamily assets totaling 85 units in Burbank, North Hollywood and Sun Valley for a total price of $13.4 mil, or around $158k/unit. The purchase was part of a long-term strategy by the buyer.

One of the properties was Strohm Apartments, a 34-unit asset at 5636 Strohm Ave in North Hollywood that went for $5.25 mil ($154.4k/unit). The property, built in 1990, includes 20 one-bedroom/one-bath apartments and 14 two-bedroom/two-bath apartments. It is located adjacent to Burbank between Cahuenga Blvd and North Hollywood Way.

A second purchase was Ratner Apartments, a 30-unit property at 10930 Ratner St in Sun Valley that sold for $4.55 mil ($151.7k/unit). It consists of 18 one-bedroom/one-bath apartments; eight two-bedroom/two-bath apartments and four three-bedroom/two-bath apartments. The property, built in 1994, sold for $4,550,000.

The third asset, Hollywood Way Apartments, located at 7601 N. Hollywood Way in Burbank, close to Bob Hope Airport, sold for $3.6 mil. It consists of 21 units ($171.4k/unit) with one single, four one-bedroom/one-bath units and 16 two-bedroom/one-bath units.

The buyer used the proceeds of two recent sales to increase and upgrade his portfolio. These included a 12-unit property at 7642 Vineland Ave in Sun Valley and a 23-unit multifamily asset at 6859 Laurel Canyon Blvd in North Hollywood which traded for a combined $4.7 mil.

How Los Angeles plans to survive the Big One

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A massive earthquake is inevitable. But now L.A. is finally beginning to prepare for the worst — and it has ‘Earthquake Lady’ Lucy Jones to thank.

The product of a year long collaboration between scientists and stakeholders, the 126-page package of earthquake safety recommendations focuses on fixing the three weakest elements of L.A.’s urban infrastructure: its pre-1980 buildings, its creaky, convoluted water system and its vulnerable telecommunications network. All in all, the report represents a “tectonic shift” in the city’s thinking, according to Garcetti.

After Garcetti spoke, a city councilman named Gil Cedillo stepped to the podium. That day, in the early hours of the morning, a huge fire had engulfed a downtown apartment complex the size of an entire city block — 1.3 million square feet in all. From the windows of his nearby flat, Cedillo watched 250 firefighters battle the “brilliant” flames and contemplated how much worse a major earthquake would be.

Think of that times 16,” Cedillo said. “Where would we be times 16?”

But just then, a woman’s voice interrupted him. It came from his left. “Sixteen hundred,” the voice said — as in, Los Angeles County would actually have to contend with 1,600 simultaneous fires after a major San Andreas earthquake, not 16.

Sixteen hundred!” Cedillo repeated automatically. Then he stopped. The magnitude of what he’d just said suddenly hit him. “Oh, my God!” he said with a gasp. He looked incredulous. “Sixteen hundred?” he asked. As in, are you sure?

“Yep,” the voice said.

“That’s unthinkable,” Cedillo whispered. “And so I…” He trailed off. He couldn’t get over it. He leaned back. “Sixteen hundred?” he asked off-mike — one more time, just to be sure.

“Yes,” the voice said. Its owner nodded benevolently. She sounded like a schoolteacher correcting the same student mistake for the thousandth time.

Her name was Lucy Jones — and as the driving force behind Garcetti’s report, she may one day be remembered as the crusader who did more to save the earthquake-prone city of Los Angeles than anyone else. First by showing people like Cedillo that the Big One could be 1,000 times worse than they think — and now by showing them that it doesn’t have to be.