Santa Monica Multifamily Market Thrives Amid a Few Challenges

by Nellie Day

Kimberly Roberts Stepp, Stepp Commercial

Kimberly Roberts Stepp, Stepp Commercial

Santa Monica is Los Angeles County’s most stable beachside apartment rental location. The prices this market commands as the year progresses continue to surprise our brokerage team. No longer the sleepy beach town of old, we are seeing capitalization rates below 3 percent on 30- to 40-plus-year-old product with stringent, and at times almost suffocating, rent control laws. There have been multiple record-breaking transactions that have taken place in Santa Monica this year, including one mind-blowing apartment deal at 537 San Vicente Blvd. that sold for $16.1 million this past March. It was then sold to another party three months later for $19 million. The old adage about location rings true for Santa Monica as buyers consider future returns in this beachside enclave.

The question right now on everyone’s mind is: how long can this last? It has been our opinion that this upward trend in pricing cannot last forever. It is inevitable that the Federal Reserve will raise interest rates soon. However, as rates rise, we will see a minimal effect on Santa Monica multifamily investment, as this “real -estate safe haven” makes investment even more desirable as stability is attractive to owners seeking long-term returns.

Even though some Santa Monica neighborhoods are becoming out of reach for many investors, the good news is that there are still pockets of opportunity for those who aren’t necessarily well-capitalized, private investment firms. Santa Monica can be an interesting place to invest for the entrepreneurial types who are looking to create value through renovation and better asset management. One up-and-coming area that offers opportunity is south of the 10 Freeway. This area has been revitalized by forward-thinking retailers. They have identified a demand from Millennials and surfers alike to create a dynamic Main Street that has energized the area and brought in much-needed capital. The Metro Line is an added bonus for this neighborhood, as is the revitalization of Lincoln Boulevard, which will be taking place over the next few years.

As it currently stands, the demand is not slowing down for Santa Monica multifamily real estate. Rents are up 15 percent since 2014. With more than $267 million in apartment transactions year-to-date in 2015, we believe this rent-controlled, development-averse beach city will continue to be a desirable place to own and invest in multifamily real estate.

By Kimberly Roberts Stepp, Principal, Stepp Commercial. This article originally appeared in the October 2015 issue of Western Real Estate Business magazine.

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