— By Kimberly Stepp, Principal, Stepp Commercial Group —
Los Angeles’ Westside apartment market is poised to see a robust pipeline of transactions in 2023. Long-time owners have been increasingly seeking to trade into out-of-state assets, while 1031 investors or those looking to pay all cash seek to take advantage of opportunities in a high interest rate environment.
Last year, Stepp Commercial Group saw a significant number of transactions with LA-area sellers who were frustrated with rent control and other problematic apartment legislation. They were looking to trade into states like Arizona, Florida and Texas because they provide a stronger ROI over the long-term and offer fewer landlord restrictions. We see that trend continuing into 2023 as owners want to enjoy a passive income as they achieve their individual investment goals and objectives. Additionally, while Measure ULA (“the mansion tax”) went into effect on April 1 — and impacts only homes and apartment complexes sold within the City of Los Angeles at $5 million or more — the overall sentiment has been sour from owners throughout the Greater LA area. They are justifiably concerned that similar legislation will soon be coming to their city, on top of other landlord-unfriendly restrictions already in place.
Apartment transactions in the Santa Monica/West Los Angeles market have definitely slowed down over the past four quarters. However, investors who are trading out of a 1031 exchange or those who can pay all cash have a significant advantage and are able to negotiate pricing with sellers given more certainty of closing. With tight inventory, more of these buyers are looking at fewer properties. If an asset is well located and meets buyer criteria, we are still getting fewer bids, but those offers are reasonable and can create a favorable situation for both the buyer and seller.
Santa Monica’s vacancy rate is currently about 7.7 percent with rents rising 2.8 percent in 2022, according to CoStar. Development activity continues to be restrained due to elevated construction costs, high labor rates and challenging permitting processes. There are currently 300 market-rate units under various stages of development in Santa Monica.
In the Westside’s greater Culver City submarket, which encompasses Culver City, Playa Vista, and the LA neighborhoods of Mar Vista, Palms and Beverlywood, the vacancy rate is just under 5 percent. In 2022, rents rose 3.6 percent. According to CoStar, there are about 1,500 units under construction, and sales activity has been strong.
While the first quarter showed all signs of being a slow multifamily sales market as Westside inventory remains tight, we anticipate more listings and transactions taking place in the second quarter, as well as subsequent quarters. As the market adjusts to an elevated interest rate environment and the dust begins to settle on economic uncertainly, owners who have been in a holding pattern but want to exit a property will be more willing to fine tune their asking price.