2025 Outlook for SoCal Apartments
As we move into 2025, the fundamentals are gaining in importance for workforce housing in Southern California, sometimes also referred to as naturally occurring affordable housing or “NOAH”. Demand is greater than ever given the catastrophic losses suffered to tens of thousands of homes in recent natural disasters. In addition, demand will continue to be driven by a large and growing permanent renter class in one of the largest gateway markets in the U.S. with 25 million people. This persistent demand underscores the long-term attractiveness of Class B and C apartments as an investment category, especially in a chronically supply constrained region like Southern California.
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Improved regulatory landscape
With the defeat of Proposition 33 in November 2024, regulatory uncertainty has been quelled, fortifying the investment thesis in the AB1482 rent controlled submarkets that Paladin targets throughout Southern California. This outcome strengthens investor confidence by ensuring a more stable operating environment for value-added investments in workforce housing. As a general rule, we avoid cities (e.g., City of LA) with more restrictive local rent control ordinances than AB1482.
Insurance remains a challenge
California’s insurance market has been strained for years, and the recent fires have only made matters worse. Older Class B and C properties often face unique challenges with outdated electrical panels, aged building systems, and potential habitability issues. While coverage remains available for experienced value-added operators who implement business plans to correct deferred maintenance and address the shortcomings of these older buildings, premiums are likely to continue to increase by at least 10-20% annually. So, disciplined underwriting is essential when making new investments today.
Economic stimulus as Los Angeles rebuilds after the fires
In the coming years, Los Angeles is poised to benefit from an expected $100 billion in future investment as the city starts to rebuild communities destroyed by the recent wildfires. With thousands of construction workers expected to move into the region, demand for NOAH rental housing will only intensify. This reconstruction effort presents an added tailwind for the sector, further supporting rental demand and occupancy rates.
Debt maturities putting pressure on small-scale owners
As anticipated in our blog post last year, Paladin’s deal flow saw a sharp uptick in the second half of 2024, a trend that is expected to grow in 2025. A common theme among sellers has been the pending maturity of existing debt, with many loans set to expire in 2025. This aligns with insights shared by Hessam Nadji in our first Breakfast Blog, which noted that 1 in 5 existing apartment loans in Southern California are expected to mature between now and 2027.
With interest rates now 300-400 basis points higher than their previous levels, many properties will struggle to support refinancing at the same loan amount. As the consensus view seems to be for interest rates to remain higher for longer, lenders are becoming less inclined to "extend-and-pretend".
As a result, forbearance and refinancing will become less viable options for property owners, particularly in Southern California where mom-and-pop landlords dominate the market. Indeed, many of these small-scale owners lack the resources or willingness to inject an additional $300,000 to $500,000 to refinance their existing loans. As a result, a growing number will be compelled to sell at prices that reflect today’s higher cost of capital.
Conclusion
Looking ahead, we anticipate steady growth in apartment transaction volume throughout 2025, creating attractive opportunities for value-add investors. With favorable demand fundamentals for the foreseeable future, reduced regulatory uncertainty, and continued barriers to new supply, we remain bullish on workforce housing in SoCal and are cautiously optimistic that our deal flow will continue to grow throughout the year.
Stay tuned for more insights as we navigate this dynamic market environment.
This report reflects the opinions of Paladin Realty and does not constitute legal advice. Paladin Realty is not a legal expert. Readers should not rely on the accuracy of the information herein and should consult carefully with their legal counsel to further understand existing and potential rent control laws, ordinances and regulations and should not make investments based on the brief summary of complex laws, ordinances and regulations provided herein. This report does not and will not constitute a part of any offering memorandum and is not intended to constitute investment advice and does not take into account the investment objectives, financial situation, or particular needs of a recipient. Paladin Realty does make any representation or warranty as to the accuracy or completeness of the contents of this report and takes no responsibility for any loss or damage suffered as a result of any omission. The opinions contained in this report are subject to change without notice. The author(s) of this report and Paladin Realty’s research team may participate in investment decisions and receive compensation based upon the performance of Paladin Realty and/or certain of its investment funds.
