The South Bay multifamily market is seeing tremendous investment, thanks to surrounding growth from the Hollywood Park development, the expansion of LAX and port activity. Additionally, more aerospace jobs are coming to the area, creating strong demand. The South Bay, however, has its challenges. The lack of investment product and rising interest rates have pushed some investors out of the market. Michael McKinney is a South Bay expert and recently signed on with CBRE as first VP. We sat down with him for an exclusive interview to talk about the South Bay multifamily market and the forecast for the year ahead.

GlobeSt.com: What are some of the major drivers of the South Bay market?

Michael McKinney: There is so much going on, like the stadium in Inglewood and all of the development that goes with it, the expansion of LAX and there is a resurgence of aerospace jobs coming back into the South Bay. Those are great, higher income jobs. A lot of the Westside is getting so expensive that it is pushing people to the East. There are pockets in the sea areas that are gentrifying as a result.

GlobeSt.com: What were some of the major challenges this year in the South Bay market?

McKinney: The lack of inventory is really creating some of the highest prices that we have ever seen. I have been in this market for 35 years, and prices are far beyond what I would have imagined. As far as what is causing the lack of inventory, when markets are good, people want to hold on. Plus, we had an election year with a lot of tax laws being changed, and that caused people to wait and see what the tax laws ended up being. That said, I think the new tax laws may free up people to sell in 2018.

GlobeSt.com: Many areas of Los Angeles saw a plateau in rent growth and a drop in deal volume. Did the activity in the South Bay reflect this trend as well?

McKinney: The activity was off this year, but that was really because of lack of properties available to purchase. All buildings, if they are priced correctly, have multiple offers. You could sell properties 10-times over if the supply was there. Demand is high, and supply has been slight. Rents have definitely spiked, and that is a general trend. They will spike and level off before spiking again as wages increase. I think there is some cooling in the market, and I think most of that is due to the shift in interest rates. Buyers are looking at where the appreciation is going to be. With interest rates going up and cap rates not compressing as much, investors are looking at rent growth for future appreciation.

GlobeSt.com: What are the most popular, up-and-coming areas within the South Bay that we should keep an eye on?

McKinney: There is a big movement from West to East in the South Bay. The good part is that neighbors and cities like it when an area gentrifies, but as you know we have a big problem with affordable housing in the area. People can only get squeezed so much. That is the backlash. Gentrification was a good word, and now it is really a bad word. Talks of rent control start surfacing and that sort of thing starts surfacing when things get as high as they are. That is the good and the bad. The good is that the area is improving and the bad is that you are displacing lower income people and where are they going to go? Markets that are going to do well are markets that are close to areas that are really taking off, like northwest Inglewood and West Hawthorne. Those are areas that are a little less dense and those are easier to gentrify. Torrance has always been a solid market with great school system.

GlobeSt.com: What is your outlook for 2018, and what are your biggest concerns?

McKinney: I see the supply continuing to be constrained. Talking with owners, a lot are very content to hold. Unless there is a pressing reason to sell, most of them are still holding on to properties. I think that buyers this year will be a little pickier as interest rates trend up, and I think most of the growth will come from wage growth, which is not as dramatic of an increase. The rate of interest rate increase is my biggest concern this year, because that is the most volatile thing that we can see.

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The Essential Drivers of the South Bay Multifamily Market

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