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Los Angeles: A 2023 Multifamily Market Update
Based on a number of multifamily market reports, legislative changes, and the influence of rising interest rates, learn how to invest in Los Angeles in 2023.
- Introduction
- Market Snapshot
- Cap Rates and What They Indicate
- Infill Opportunities in LA
- Suburban LA Properties
- Rent Growth and Vacancy Trends
- Legislative Changes and Market Impact
- Single-Family Zoning Overhaul
- The New Downtown and Hollywood Zoning Plans
- Downtown LA Reforms
- Hollywood Zoning Reforms
- Submarket Focus: Hotspots and Emerging Areas
- Downtown L.A.
- Koreatown and Westlake North
- Financing Conditions and Challenges
- Rising Interest Rates
- Tightening Lending Standards
- Conclusion
- Additional Resources
- Get Financing
In the dynamic world of real estate, Los Angeles stands out as a beacon for multifamily investments. With its vast urban sprawl and diverse demographic, the city offers abundant opportunities for those venturing into this niche.
This piece digs into the multifamily investment landscape in Los Angeles for 2023, with insights relevant whether you’re a first-time apartment building investor or a seasoned pro.
Introduction
Nestled between the Pacific coastline and rolling hills, Los Angeles is not just the epicenter of entertainment; it's a real estate goldmine. This guide is crafted for those in the early stages of multifamily investment or those with some exposure looking to deepen their L.A. market understanding.
Whether you're a native Angeleno or from the other side of the country, whether you’re getting into multifamily for the equity growth or the tax benefits, this guide aims to simplify the multifamily market’s complexities, empowering you with the knowledge to make astute investment decisions.
Market Snapshot
To make informed investment decisions, it's crucial to grasp the multifamily market's current trends and metrics in Los Angeles. Let's dive deeper into what these numbers mean for investors.
Cap Rates and What They Indicate
The capitalization rate, often referred to as the cap rate, measures the expected return on a real estate investment. Here's a breakdown of the recent figures for L.A. and their implications, pulled from CBRE’s latest cap rate survey from the first half of 2023.
Infill Opportunities in LA
The cap rate range stood from 4% to 4.25% for stabilized, Class A properties and 4% to 4.5% for Class A value-add properties.
Suburban LA Properties
These assets had cap rates of 4.25% to 4.5% for stabilized Class A properties, a large jump from the 3.5% to 4.25% range reported in the second half of 2022.
The overall increase in cap rates, especially in suburban areas, suggests that properties may be selling for lower prices relative to their income potential.
This could be influenced by the rising interest rates over the past 18 months, which have made financing significantly more expensive and has cooled transaction activity, thus driving buyer pricing expectations down. For investors, a higher cap rate might indicate a better return potential, but it can also suggest increased risk, especially if interest rates continue to rise.
Rent Growth and Vacancy Trends
Rent levels and occupancy rates give insights into the demand for rental properties in the market.
A recent Colliers report noted a modest 0.7% growth in rent from the second quarter of 2022 to the same time this year. However, keep in mind that rent levels are still 11.2% higher than before the pandemic.
Occupancy rates have been falling as rent growth decelerates. The metro had an overall occupancy rate of 96.3% in mid 2022, falling to 95.2% at the end of the second quarter this year.
Although the slight growth in rent indicates relatively stable demand for rental properties, the increase falls significantly below the national average rent growth of 1.5% reported by Yardi Matrix’s August multifamily report.
The sharp contrast between today’s rents and those of the pre-pandemic era highlight how, like in nearly every market nationwide, severe affordability concerns exist for renters. The dip in occupancy rates might be a result of various factors, including tenants seeking homeownership or relocating to more affordable regions. For investors, this could mean a need for competitive pricing or added amenities to attract and retain tenants.
Legislative Changes and Market Impact
Laws and regulations play a significant role in shaping the real estate landscape. Recent legislative changes in Los Angeles have introduced new opportunities and challenges for multifamily investors. Let's delve into these changes and analyze their potential impact.
Single-Family Zoning Overhaul
Starting January 1, 2022, parcels zoned as single family in California began to allow multifamily properties. This measure is statewide, meaning local zoning measures cannot bar the use of single-family land for apartment buildings.
This is a potential game changer for investors. It broadens the scope of land available for multifamily development, potentially leading to an increase in supply. However, while this opens up opportunities, it's essential to consider local demand, infrastructure, and neighborhood dynamics before investing. Increased supply without corresponding demand could lead to vacancies and lower rents.
The New Downtown and Hollywood Zoning Plans
In May 2023, the L.A. City Council approved two significant proposals focused on two different parts of the city.
Downtown LA Reforms
Prior to May, housing was only permitted to take up 33% of the land downtown. This has now increased to 60%. City officials say this could potentially add 100,000 units over the next two decades.
Hollywood Zoning Reforms
The Hollywood plan could introduce 35,000 new units in and around the Hollywood area. Developers incorporating affordable units into their projects can avail of various benefits.
These zoning plans signal a commitment to addressing the city's housing shortage. For investors, downtown L.A. and Hollywood could offer lucrative opportunities, especially if they can incorporate affordable housing and tap into the associated benefits.
However, as with any surge in development, it's crucial to monitor market saturation and demand. An oversupply could impact rental rates and occupancy.
Submarket Focus: Hotspots and Emerging Areas
L.A. is a mosaic of diverse neighborhoods, each with its unique appeal to renters and investors alike. To make informed investment decisions, it's crucial to understand both the supply side (development) and demand side (renter interest, local amenities, job markets, etc.) of each submarket you’re considering.
Downtown L.A.
With about 4,000 units in the development pipeline, according to Yardi Matrix, downtown L.A. is undoubtedly an area of interest for many developers. The recent zoning changes, which allow for a higher percentage of housing in buildings, further emphasize this growth.
While there's a clear uptick in development, it's essential to understand the reasons behind it. Downtown L.A. is not just a business hub; it's also becoming a residential and cultural center, with an increasing number of amenities, restaurants, entertainment venues, and job opportunities. These factors can attract a diverse renter base, from young professionals to families. However, investors should monitor the pace of development to ensure the supply doesn't outpace demand, leading to potential vacancies.
Koreatown and Westlake North
Koreatown and Westlake North are witnessing significant development, with over 2,000 and approximately 1,600 units underway, respectively.
Beyond the numbers, Koreatown and Westlake North have seen a surge in popularity due to their cultural vibrancy, local eateries, and proximity to major employment hubs. These neighborhoods offer a blend of urban living with a touch of local character, making them attractive to a wide range of renters.
For investors, this means potential stable rental incomes and property appreciation. However, keeping an eye on the local job market, transportation improvements, and renter demographics will be essential to gauge the long-term potential of investments in these areas.
Financing Conditions and Challenges
In the realm of multifamily real estate investment, the financing landscape plays a pivotal role in shaping opportunities and returns. Understanding the current conditions and potential challenges is essential for multifamily investors in L.A.
Rising Interest Rates
Interest rates have seen increase upon increase since early 2022. This uptrend doesn't just affect monthly mortgage payments; it has broader implications for the real estate market.
As borrowing becomes more expensive due to higher rates, potential profitability for investors can decrease, especially for those who rely heavily on loans.
Furthermore, as the cost of capital rises, property values may face downward pressure. Buyers might be more conservative in their offers, accounting for the higher financing costs, potentially leading to fewer transactions and softer property prices.
Tightening Lending Standards
The current environment has lenders becoming more conservative, resulting in stricter financing standards. This trend is particularly evident for non-GSE backed loans, which now come with lower loan-to-value ratios and more demanding borrower qualifications.
For investors, this means having to put down larger down payments, which can directly impact return on equity. New or less-established investors might find it challenging to meet these stricter qualifications, making entry into the market more difficult.
Still, there’s an important caveat here. While financing is indeed getting more expensive, there are still great loan terms to be found — if you know where to look. Using a marketplace (like ours, which shops your deal to thousands of lenders) is a natural choice to ensure you get the best financing terms.
Conclusion
Navigating the multifamily investment landscape in L.A. requires a keen understanding of both market trends and external factors like legislation and financing conditions. 2023 presents a mix of opportunities and challenges for investors.
The legislative changes open new avenues for development, particularly in downtown L.A. and emerging neighborhoods like Koreatown and Westlake North. However, it's essential to balance this with an understanding of renter demand and neighborhood dynamics to ensure a successful investment.
On the financing side, rising interest rates and stricter lending standards mean that investors need to be more strategic and possibly consider alternative financing solutions or partnerships.
Ultimately, L.A.'s multifamily market remains dynamic and full of potential. For those willing to do their research, stay updated on market conditions, and possibly adapt their strategies, the city offers promising opportunities for both short-term gains and long-term growth.
Additional Resources
For those eager to dive deeper into the multifamily market in L.A., a wealth of resources can provide further insights, data, and perspectives. Here's a curated list to help you stay informed and make well-educated investment decisions:
Los Angeles City Planning: The official city website offers detailed zoning maps, upcoming changes, and other valuable resources that can impact real estate investments.
CBRE's Cap Rate Survey: An invaluable tool for investors, this report provides in-depth data on cap rates across various property types and regions, including L.A.
Market Reports: Many brokerages and data providers put out regularly updated market insights. These reports are usually free to access and offer a comprehensive view of the multifamily landscape in L.A. and other major markets.
Local Real Estate Meetups and Seminars: Engaging with local real estate communities can provide firsthand insights, potential partnerships, and the latest trends from seasoned investors and professionals. You can find such groups online or through local organizations.
Remember, while these resources are beneficial, always cross-reference information and consult with real estate professionals or financial advisors before making significant investment decisions.
- Introduction
- Market Snapshot
- Cap Rates and What They Indicate
- Infill Opportunities in LA
- Suburban LA Properties
- Rent Growth and Vacancy Trends
- Legislative Changes and Market Impact
- Single-Family Zoning Overhaul
- The New Downtown and Hollywood Zoning Plans
- Downtown LA Reforms
- Hollywood Zoning Reforms
- Submarket Focus: Hotspots and Emerging Areas
- Downtown L.A.
- Koreatown and Westlake North
- Financing Conditions and Challenges
- Rising Interest Rates
- Tightening Lending Standards
- Conclusion
- Additional Resources
- Get Financing