This Is Why I Think Hollywood Is Bottoming

What matters

1. I think Hollywood has finally priced in the bad news.Hollywood has been through one of its toughest stretches in decades. Production slowed dramatically. Entertainment layoffs hurt the local economy. Investor sentiment weakened, and apartment values followed.  For disclosure, I own apartments in Hollywood. Occupancy has remained stable, but rent growth has slowed. Markets don't bottom because the news suddenly becomes great. They bottom because prices finally reflect the bad news.  I'm not saying Hollywood has bottomed. I'm saying this sale made me wonder if we're getting close. Markets usually don't bottom because the news suddenly becomes great. They bottom because prices finally reflect the bad news.   If the RSO policies against owners continue that they can't raise rents or lose the ability to bring rents to market then we are going to go down unless rates drop at the same time to offset that.  
2. The numbers are looking interesting.  This buyer acquired the property for: $211,000 per unit, $288 per square foot, 9 GRM and an estimated 6.9% cap rate today If rents increase just a little and turnover goes down, the yield approaches 7% without a major renovation.  Just a few years ago, buyers were paying 4% cap rates because debt was incredibly cheap which still puzzles me.  Buying because rates went down and cap rates compressed means you're taking on way more risk.   Today, you're buying a much higher yield at a significantly lower price and finding a bid is hard.
3. JPMorgan just validated the basis.  The buyer obtained approximately 75% loan-to-value financing from JPMorgan Chase.  A major lender reviewed the market, the borrower, and the asset and concluded the economics supported that level of leverage. That's a signal that I am putting in my notes and that is not something anyone should ignore.
4. Hollywood doesn't need another boom. It just needs stability.  This investment doesn't require Hollywood to become the hottest neighborhood in Los Angeles again.  It simply requires production to stabilize, employment to improve modestly, and apartments to remain in demand. Hollywood is still one of the world's entertainment capitals. Netflix, Disney, Paramount, Amazon MGM, and dozens of independent studios continue to have a major presence across Los Angeles, while California has significantly expanded its film and television tax incentives to attract more production. If Hollywood simply stops getting worse, today's pricing could look very attractive.