Decron returns to L.A. with a $699,000-a-door basis trade

Decron Properties has acquired the 163-unit mixed-use building at 5550 Wilshire Boulevard for $114 million, its first Los Angeles purchase in nearly two years. At roughly $699,000 a unit, the return rests more on basis than on rent growth.

The Miracle Mile property, developed in 2010, carries 14,686 square feet of ground-floor retail fully leased to Chipotle, Five Guys and FedEx Office, beneath which sit one-, two- and three-bedroom apartments and townhomes along with a pool and spa, a resident lounge, a private movie theater and rooftop lounges. No lease-up or construction bet here, and Decron pegs the $114 million price at a substantial discount to the cost of replacing the building.

David Nagel, the firm's president and CEO, framed the return as a pricing call rather than a change of heart. "Our growth-market strategy has never been a referendum on Los Angeles," he said in a statement. "For a period, the risk-adjusted returns here simply weren't competitive with what we were finding in the Sun Belt markets." Having concentrated on the Sun Belt, Decron says it is still pursuing Los Angeles, San Jose, Orange County, San Diego and Seattle, and it owns nearly 10,000 multifamily units and about 1 million square feet of retail across California, Washington and Arizona—roughly 8.7 million square feet in all.

Nagel calls Los Angeles one of the nation's most important and chronically undersupplied housing markets, where new supply is difficult and expensive to build, but reading the purchase as a bullish call on rents misses where the return actually sits. This is a buyer returning when a 2010-vintage asset with a leased retail base can be had below replacement cost, which suggests the spread that pushed Decron toward the Sun Belt has narrowed enough to pull it home—and that the repricing, on Decron's telling, happened in the Sun Belt.

As this publication has argued, the apartment trade has split between agency capital marking down and new equity paying full basis for the right product, and the spread between doors is now an operator and location read rather than a market read. At $699,000 a unit this is a basis trade, not a rent bet, and it is the right call: the retail rent roll pays for the waiting, a building finished in 2010 carries no construction risk, and the apartments only have to hold rent against a supply pipeline that the buyer says is expensive to add to. The coverage doesn't identify the seller or the deal's capitalization, which leaves the ground-floor leases as the thing to watch: fully leased retail to national tenants is what allows a below-replacement basis to hold through a soft year of rent growth.

JLL's Blake Rogers represented both Decron and the seller in the transaction. The next comparable trade in Miracle Mile will show whether that discount to replacement cost was available to one buyer or has become the submarket's clearing level.