Los Angeles Multifamily Insights November 2024: Now That the Presidential and State Elections Are Over, What ‘s Next for CRE investors

Proposition 33 Defeated, Proposition 34 Passes, Proposition 36 Passes

A small win for California housing providers came with the failure of the passing of Proposition 33, which proposed to undo Costa Hawkins, and impose strict rent control measures. The Proposition failed by more than 62 percent in opposition to 38 percent that was in favor of passing it.

Proposition 34 passed narrowly which limits nonprofits’ ability to use donations to fund things outside of the scope of their primary business.

Proposition 36 makes repeat offenders of theft subject to a felony if they are charged with stealing three times in each period.

It appears that the state that is historically known for its liberal policies has turned a corner to law and maintain property owners’ rights. It will be interesting to see how this plays out in the upcoming years.

?

What does a Trump Presidency mean for CRE Investors

For active participants in the CRE market (active investors, brokers, lenders, etc.) Trump’s reelection is viewed mostly in a positive light; the expectation is that there will be further interest rate cuts, a return of 100 percent bonus property depreciation, and an extension of the federal estate exemption (currently 14m) which were due to reverse to 2017 levels of 7m if not extended prior to the end of 2025.

As a result, active participants forecast an increase in deal flow in 2025-citing the 28b dollars’ worth of pending loan maturities for commercial real estate across the country.

Until recently, much of transaction activity had been put on hold for multifamily investors in Los Angeles County contingent upon the outcome of Proposition 33; owners exploring selling held their decisions based upon the outcome of the presidential election.

In recent weeks since it’s passing, my experience has been that most multifamily owners are holding off on making any decisions (to meet or to transact) until 2025.

For passive CRE owners (which makes up the majority by far) not a great deal has changed for them regarding their investment strategy as many long-term operators I’ve spoken with are low leveraged and benefit from low property taxes thanks to Proposition 13.

Conversely, the President’s plan to deport undocumented immigrants will have implications for the construction industry which in many cities relies on undocumented workforce for inexpensive labor, which will invariably create increase costs for construction.

LA MSA Sales Velocity (year to date)

Since January, there have been 1,175 5+ units sold in the Los Angeles MSA closed year to date, with another 140 in escrow. (Including 4 units the amount of sales increased to 1,406 sold YTD.

Compared with last year, the current sales velocity is 66 sales behind 2023 numbers, leading this writer to project that sales will end the year anywhere between 5-10 percent higher than 2023, but still significantly lower than 2022 5+ unit sales (2,000) and 2021 5+ units’ sales (3,000).

Many forecast that deal flow will be higher next year, due to interest rate cuts and prospective sellers tired of increased operating costs and government regulation; most insurance brokers I have spoken with in the past year project continued increases in premiums over the next 2-3 years to make up for the perception of risk due to wildfires and increased repair/replacement costs.

From a regulatory perspective, unincorporated Los Angeles County has lowered allowable rental increases to 60 percent of CPI or a max of 3 percent, whichever is less, and the city of Los Angeles is exploring lowering maximum allowable rental increases, which are currently 4 percent for most properties subject to rent control ordinance.

These factors will lead to an increase of motivated sellers in the Los Angeles area-will investor demand for these properties rebound is left to be seen.

Notable Sales

Since the October edition of LA Multifamily insights there have been three multifamily sales that have transacted exceeding the 20m sales price:

?on November 11th, 6487-6489 Cavalleri Rd, a 1993 construction 68-unit property sold for 70.5 million, or 1.036m per unit, in transaction between Pacific Eagle US Fund and BH3, a private real estate investment group.

It is important to note that this sale joins a small group of property sales in the Los Angeles MSA that have sold for more than 1m per unit in the past two years, most recently there were two smaller properties in the Brentwood and Westwood submarkets in Los Angeles were units sold for more than 1m per unit.

On November 7th, 9222-9248 Van Nuys Blvd, an 87-unit apartment building in Panorama City sold for 23.1m or $265,517. The seller was Jamboree Housing, an affordable housing developer/operator which sold to Preservation Partners, a South Bay based affordable housing operator.

?

On October 24, West Holdings sold 441 w. 3rd St., a 93-unit apartment building in San Pedro to a partnership between affordable housing/nonprofits Integrity Housing and Post Investment Group for 24.25m, or 260,753 per unit.

?

Capital Markets Report By Charles Jones

Multifamily Real Estate Capital Markets Report: Southern California (November 2024)

The multifamily real estate sector in Southern California remains dynamic, with key regions experiencing robust demand driven by economic activity, population growth, and limited housing inventory. Here's a breakdown of the current market conditions and trends:

Market Conditions

1.?????? High Demand with Low Vacancy:

·?????? Regions like Los Angeles, San Diego, and Orange County are seeing consistently low vacancy rates. In Los Angeles, rising rental rates continue to reflect strong demand despite affordability challenges

2.?????? Emerging Investment Markets:

·?????? Inland areas, such as Riverside and San Bernardino, are gaining investor attention due to relative affordability and proximity to major job centers. Coastal cities like Oxnard and Ventura also stand out for their growing appeal as more cost-effective alternatives to Los Angeles

3.?????? San Diego's Growth:

·?????? San Diego's multifamily market is particularly strong, fueled by its expanding biotech and tech industries. The city is experiencing record-high rents and notable interest from institutional investors

?

Capital Market Trends

1.?????? Financing Costs:

·?????? Interest rates have stabilized somewhat, but they remain higher than during the pre-2023 period. This is impacting cap rates, which are rising modestly as buyers demand higher returns due to increased borrowing costs

2.?????? Transaction Activity:

·?????? Deal volumes in the multifamily sector have slowed compared to the peak years of 2021–2022, but the market remains active, particularly for Class B and C properties that cater to middle-income renters

3.?????? Institutional Interest:

·?????? Despite market challenges, institutional investors are targeting well-located properties in growth markets. San Diego and Inland Empire submarkets are seeing heightened interest for long-term growth potential

Future Outlook

1.?????? Short-Term (2024–2025):

·?????? Rental growth is expected to continue, supported by low supply and sustained demand. New construction projects are limited by regulatory constraints and rising costs, further tightening the supply-demand imbalance

2.?????? Long-Term (2026 and Beyond):

·?????? As urbanization persists and California remains a desirable location, the multifamily sector is poised for stable growth. However, challenges like affordability concerns and potential regulatory changes will need close

Opportunities for Investors

Investors are focusing on diversification across emerging and core markets. Strategies such as value-add investments in underperforming properties and exploration of financing tools like bridge loans and rental portfolio loans are becoming increasingly popular

Southern California's multifamily market offers substantial opportunities but requires a nuanced approach, balancing risk and reward amid evolving economic and regulatory conditions.

Note: Charles Jones is a lending professional with over twenty years of experience of lending for private and public lending institutions and has been involved more than 200m worth of loans for commercial real estate assets across the country.

Summary

The Southern California multifamily market continues to face headwinds due to high insurance costs and increases in regulation in markets primarily concentrated in Los Angeles County. However increased demand has been seen in markets without local rent control in Los Angeles, Orange County and San Diego where rent growth has remained strong and vacancy rates have remained low (less than five percent).

If you are interested in investing or selling existing multifamily or development projects don’t hesitate to reach out to me at (310) 804-3829 or [email protected].

If you have needs for capital to fund new acquisitions or new projects reach out to Charles Jones at (626) 421-4532 or [email protected].

?