November 2021 LA Multifamily Update
For the majority of LA apartment brokers, the past 2 quarters have been extremely active. Investors are still finding good reasons to both buy and sell local multifamily. On a national level, commercial real estate volume hit $450 billion for the first three quarters of a year which is the highest volume since 2007. Overall commercial real estate nationally has increased by 18% this year and 8% higher than pre-pandemic levels. 60% of all the volume was comprised of multifamily and industrial which is no surprise.
On a local level, multifamily pricing has surpassed pre-pandemic levels. Most of my listings over the past 6 months have received 5+ bids with a handful going above list price. Buyers flushed with cash and easy access to debt can pencil deals they would not have been able to do pre-pandemic. While rates remain in the low 3s and cap rates averaging around 4%, buyers are realizing it is much better to put their capital to work than lose out to inflation while their funds stay in the bank.
Are apartment vacancies down?
Overall, the vacancy rate in LA County is 4% which is a significant improvement over last year. Each submarket has absorbed units at a relatively quick pace; however, certain submarkets are keeping their vacancies rates much lower than others. As more employers continue to return to the office, vacancies will continue to fall in hard hit submarkets such as Downtown and Westside. Since net absorption has increased substantially landlords have been in the driver seat and are able to ask for bigger rents. Concessions are down considerably; however new products are still offering concessions such as a free month or reduced deposit.
Covid Relief Funds
Now, that California Covid relief has come in, buyers are not as concerned about non-paying tenants as they were earlier this year. At the beginning of the year, I had a few listings with 20% - 30% of the building not paying rent. One of my listings even had 50% non-paying tenants. Most buyers asked for substantial discounts where now buyers seem completely fine with non-payers and many lenders understand the situation well and will work with the borrower. A current listing of mine has 38% nonpaying tenants, but still received eleven bids with nine of the bids non-contingent from day one. Not one buyer was concerned about the non-paying tenants.
Are cap rates going to remain this low?
Even though treasury yields are rising from their summer lows, rates remain extremely low and lenders are still competing to lend on LA multifamily. That continues to translate to low cap rates throughout the city and nation as a whole.
The inflation debate is heating up with core inflation remaining high regardless of the Fed’s stance as being transitory. Treasury yields will have to eventually rise which, in turn, pushes multifamily lenders to increase their rates. As net operating income gets better through new unit lease up at favorable market rents, cap rates will remain low. Of course, getting back to rent increases in LA is a necessity for us to enjoy a return anywhere close to inflation.
Investors are hopeful the favorable spreads between cap rate and treasury yields will remain wide, which will continue to keep cap rates low in the foreseeable future.
Where are LA multifamily owners exchanging?
Multifamily owners are exchanging out of state now more than ever. Nearly 40% of my 1031s have been out of state this year. Some of the exchanges have been local owners who are deciding to retire in a tax-free state and are therefore moving their equity to that state. Some of those exchanges I have completed this year are into Nevada, Tennessee, and Florida through a mix of multifamily and net lease. The owners are all getting higher cash flow with significant tax advantages.
Other owners are exchanging out of state to diversify their portfolio given the potential regulation risk of owning their entire portfolio locally.