The Los Angeles Multi-family Market in 2022

[Ethan Hanes]

In a normal market, owners of multifamily properties typically consider selling for the following reasons: personal health or fatigue, political and economic uncertainty, government over-regulation, physical or functional obsolescence, changing neighborhoods (homelessness), vacancy problems, and in some cases the inability to raise or even collect back rents to help cover expenses. These are all valid reasons.

Today, the market is very uncertain due to multiple factors that are foreshadowing a possible drop in apartment values. In other words, we believe the multifamily market is beginning to drop substantially. The Fed’s interest rate hikes of 50 to 75 basis points, inflation at a 40-year high, the continuing war in Ukraine, deficit spending, and the current political situation are all signs that point to a possible upcoming fall in values, similar to the situation in the early ‘90s that lasted from July 1990 to December of 2000. Today, properties are selling at a cap rate of 2-3% and gross rent multipliers of 15 to 16 and above. How could they possibly get any higher? This plus JPMorgan Chase CEO Jamie Dimon is predicting an economic hurricane according to CNN Business June 2, 2022. Arthur Laffer, a former member of President Reagan’s Economic Policy Advisory Board, agrees there is a storm coming.

Now may very well be the best time to take advantage of your property’s current value. Why risk losing thousands or even millions of dollars in equity?

[Solicitation Removed by Moderators]

Ethan Hanes

[Allen Duan]

What do you think the outlook is in the next 1-2 years for purchasing multi-family in Los Angeles? Would your analysis mean it would become a good time to find deals?

[Ethan Hanes]

Quote from @Allen Duan:

What do you think the outlook is in the next 1-2 years for purchasing multi-family in Los Angeles? Would your analysis mean it would become a good time to find deals?

Allen,

As always, the future is unpredictable. Right now we are seeing more price reductions and more properties sit for longer amounts of time. 

If you are a buyer, there’s always good deals out there. It is becoming tougher to find a good deal with good interest rates (due to the rising interest rates). I’ve seen a lot of buyers looking for properties with seller financing. This is a good route to take because usually you are able to buy a property with a lower-than-market interest rate. 

That would be my suggestion Allen, please let me know if you have any questions.

[Will Barnard]

I see the opposite as a distinct possibility moving forward. While interest rate hikes will hinder some buyers and some valuations, they are still below the average norm and (at least in So Cal) the housing shortage remains. When you consider how many would be buyers of homes have now been priced out of the market due to the massive value appreciations along with the higher interest rate costs, these would be buyers are forced to find a rental unit instead which should generate even more demand for rental units. Rents continue to climb which increases gross rev and in turn, covers the added costs moving forward. Values would only retract if NOI is negatively impacted and I just don't see that yet.

[Allen Duan]

Thanks Ethan!

[Ethan Hanes]

Quote from @Will Barnard:

I see the opposite as a distinct possibility moving forward. While interest rate hikes will hinder some buyers and some valuations, they are still below the average norm and (at least in So Cal) the housing shortage remains. When you consider how many would be buyers of homes have now been priced out of the market due to the massive value appreciations along with the higher interest rate costs, these would be buyers are forced to find a rental unit instead which should generate even more demand for rental units. Rents continue to climb which increases gross rev and in turn, covers the added costs moving forward. Values would only retract if NOI is negatively impacted and I just don't see that yet.

 Will,

This is a great perspective. It further solidifies the statement: “nobody knows the future”. I talk to about 50 different multifamily investors daily and the difference in opinions is outstanding. Some have told me that they simply can’t raise their rents because of rent control, some have told me they’d rather not raise their rents than risk vacancy, etc. The most important factor is that expenses (water, utilities, insurance, etc.) are not going to stop accelerating.

When you are unable to raise rents but your expenses are going up, how are you going to get the same cash flow you’ve been producing? 

Full transparency, I’m not an investor yet. I’m a salesperson. My job is to show people how they can do better and how we can help them. This opinion might be biased! 

[Will Barnard]

Quote from @Ethan Hanes:

Quote from @Will Barnard:

I see the opposite as a distinct possibility moving forward. While interest rate hikes will hinder some buyers and some valuations, they are still below the average norm and (at least in So Cal) the housing shortage remains. When you consider how many would be buyers of homes have now been priced out of the market due to the massive value appreciations along with the higher interest rate costs, these would be buyers are forced to find a rental unit instead which should generate even more demand for rental units. Rents continue to climb which increases gross rev and in turn, covers the added costs moving forward. Values would only retract if NOI is negatively impacted and I just don't see that yet.

 Will,

This is a great perspective. It further solidifies the statement: “nobody knows the future”. I talk to about 50 different multifamily investors daily and the difference in opinions is outstanding. Some have told me that they simply can’t raise their rents because of rent control, some have told me they’d rather not raise their rents than risk vacancy, etc. The most important factor is that expenses (water, utilities, insurance, etc.) are not going to stop accelerating.

When you are unable to raise rents but your expenses are going up, how are you going to get the same cash flow you’ve been producing? 

Full transparency, I’m not an investor yet. I’m a salesperson. My job is to show people how they can do better and how we can help them. This opinion might be biased! 

 Well, every situation and every investment in each location will differ so there is no one answer to fit all. That said, there should always be a way to raise rents to keep up with costs, of course in record inflationary periods like we find ourselves, all bets are off. Improving the exterior and interior of units can help raise rental rates, offering additional services or amenities can also help. Looking for ways to add income streams like laundry services, snack machines, covered parking (for increase rental fees), billboards added to property, etc are some ways to add to your bottom line. Of course cutting costs is also a play here as well. SHopping services and products for better rates like insurance, management fees, etc can help. If inflation is outpacing your costs vs income, often we will have to ride that out and except lower returns for a period until the market shifts. Inflation will not stay as is forever and knowing this, having capital reserves to weather the storm is a necessity to stay afloat at times.