Multifamily Memo: Does Today's Market Favor Buyers or Sellers?

Does Today’s Market Benefit the Buyer or the Seller?

With the market shifting over the past quarter due to recession risks and higher rates, values have started to come down a little bit. Certain products such as non-rent control multifamily in LA have not seen any meaningful price corrections however the typical rent control building in LA has seen some price drops. Buyers are calling us more and more asking for the “good deals” in anticipation of a larger market correction like the stock market.

It seems that buyers have the slight upper hand currently even though values are not down very much. A few of my recent under contracts went under at values still very close to where they would have traded in the beginning of the year, so today’s market can ideally benefit both Buyers and Sellers.

How Much Inventory is There on the Market?

Active multifamily inventory has risen quite a bit mainly due to longer selling timeframes then we are accustomed to. For example, there are 127 active apartment listings in LA County in our Marcus & Millichap inventory alone, which is more than we are used to. Costar has 336 active listing of 5+ unit apartment buildings from Downtown LA to the ocean which is historically high.

For a seller, that means strategic pricing is imperative to gaining enough traction to sell. We are also seeing more portfolio listings of sellers trading a big piece of their overall portfolio in one shot. This is indicative of overall investor sentiment on the current state of this performing market.

Is It Too Late to Refinance My Building?

With the Fed funds rate currently between 2.25% – 2.5%, many investors feel they missed the opportunity to refinance and trade. Many multifamily lenders have programs in the 4.6% - 4.75% range which is still extremely attractive. Rates were at a similar level pre-covid. Multifamily rates have been very stable over the past two months especially as treasury yields have started to come down in the past few weeks. For investors that are still considering a refi, or an exchange, now is a very attractive time to lock in long term debt.

What Type of Product is Selling Now?

With rising rates, investors are more cash flow driven. They are now focusing on the initial cap rate versus the pro forma cap on value-add opportunities. When rates were in the 3s investors were willing to purchase based on pro forma cap rates and sometimes ignore the current rents, even for LA rent control. Due to the higher cost of capital and higher renovation costs, some of those opportunities went out of favor with investors who are now using higher underwriting standards. Many value-add opportunities that were trading in decent locations for 3 caps are now out of favor and now have to offer positive cash flow in order to trade.

How Does LA Rent Growth Compare to the Rest of the Nation?

Rents throughout the nation are up 12.2%, however that percentage seems to have peaked and is starting to cool off a little bit. That being said, LA rent growth kept up pace with a 12.7% rent growth. Locally, Class B and C multifamily had larger rent growth over the past year versus Class A.

Other markets outside of LA has a much higher risk for oversupply with 824,000 units in development. Most of the markets that are seeing their supply tick up are markets in the sunbelt states which have seen massive rent growth over the past two years. Los Angeles is more insulated with just over 13,000 units coming online this year, which represents a 2.9% increase in the housing stock. It is no surprise, a majority of units under construction in core LA has been in Downtown with around 3500 units under construction and Koreatown with over 2200 units under construction.

When Can I Increase Rents on My Occupied Tenants?

Los Angeles rent control units are still prohibited from increasing rents until one year after the “local emergency period” is over. As of now, we still don’t know when that date will be. Multifamily owners have lost on three years of increases and NOI growth which could have resulted in even higher price points than we are achieving today.

There is a silver lining for buildings that fall under California rent control but do not fall under LA rent control. As inflation locally and around the globe is close to double digits, we are able to increase those units by up to 10%. This has translated to higher values and higher demand for post 1978 construction buildings around LA, especially in prime locations.