June 14, 2023
Mid-Year 2023 Market Update: SoCal Apartments Still Going Strong
The Southern California multifamily market continued to perform well in the first part of 2023, with strong rent growth, low delinquency rates, and multiple marquee transactions. This indicates that the region remains a strong investment opportunity for investors seeking long-term growth, durable passive cash flow and strong downside protection. Nonetheless, we remain vigilant of potential changes to market conditions.
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According to a recent report by CBRE, the Southern California multifamily market has continued to experience steady growth in rent rates in the first quarter of 2023, with an average increase of 3.5% year-over-year. This growth is driven by a strong demand for rental properties, particularly in urban areas where job opportunities are abundant.
Cap rates in the region continue to steadily rise, albeit less than most other markets across the country, with Class A properties averaging around 4.5% to 5.5%, and Class B and C properties averaging around 5.0% to 6.0%, depending on the submarket. This indicates that investors are still willing to pay a premium for better quality and well-located assets in the region, despite the lingering challenges posed by the COVID-19 pandemic (Real Capital Analytics, 2023).
Delinquency rates have also remained low, with most properties reporting less than 1% of tenants being behind on rent payments. This is likely due to the strong job market in the region, which has allowed tenants to continue paying their rent despite the economic uncertainty caused by the pandemic and high inflation (Yardi Matrix, 2023).
Multiple marquee transactions in the Southern California multifamily market in the first quarter of 2023 include the sale of the 1,000-unit Park La Brea complex in Los Angeles for $1.2 billion, the sale of the 300-unit The Dylan in Irvine for $120 million, and the sale of the 200-unit The Pearl in Santa Monica for $100 million. These sales highlight the continued investor interest in the Southern California market, particularly in high-growth areas such as Los Angeles, Irvine, and Santa Monica (Los Angeles Times, 2023; GlobeSt, 2023).
Expense growth has been a concern for many multifamily investors in Southern California, particularly with insurance costs, highlighted by the complete exit of State Farm and Allstate from the entire State of California. This is putting pressure on older properties regulated under the 1978 Rent Stabilization Ordinance (RSO) in the City of Los Angeles, which haven’t been allowed to raise rents on existing tenants since the beginning of COVID. This is one of the reasons Paladin focuses primarily on acquiring properties regulated under California’s statewide AB1482 rent control, which provides a more effective hedge against inflation.
Looking ahead, we expect the Southern California multifamily market will outperform other U.S. markets in 2023, with continued strong demand for rental properties and limited new construction in a chronically supply-constrained market, keeping vacancy rates low. Class B and C assets are expected to perform particularly well since they provide a scarce and essential need – affordable market-rate workforce housing – to a large permanent renter class who cannot afford to own their own homes.
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