Santa Monica Apartment Cap Rates Held Steady in 2018

Santa Monica apartment cap rates held steady in 2018, with pricing both per unit and per square foot consistent with numbers in 2017. According to Kimberly R. Stepp of Stepp Commercial, the average cost per unit in Santa Monica was $455,871 and the average price per square foot was $573 in 2017, while the average cost per unit was $458,443 and cost per square foot was $546 in 2018.

“The market remained stable showing tepid growth late in the year,” Stepp, a principal at Stepp Commercial, tells GlobeSt.com. “The pricing indicators and overall sales volume remained consistent with 2017 levels, and cap rates averaged the same for both 2017 and 2018.”

While there was little pricing growth, Santa Monica remains a favored market for investors who can land one of the rarely traded apartment buildings in the market, and Stepp doesn’t expect that to change in 2019. What will change? Stepp says that inventory will likely increase this year. “We’re optimistic that the Santa Monica market along with prime Westside markets will continue to provide steady long-term growth for investors,” she explains. “We see the volume of inventory increasing in 2019 due to the once imminent threat of Prop 10 no longer being an issue and interest rate fluctuation. The desirable location coupled with a steady influx of tenants willing to pay top dollar throughout the city are key factors that contribute to property pricing remaining robust through 2019.”

Still, with Prop 10 off the table, Santa Monica’s apartment stock is largely already under rent control, making it a challenge for investors. However, Stepp says that there is still upside to be had for patient capital. “The vast majority of multifamily buildings in Santa Monica and the prime Westside are under rent control. The silver lining is capitalizing on vacancy decontrol which can allow for generous upside—once units become vacant the rent can be brought to the current market rate which is significant in rental areas like Santa Monica,” says Stepp. “At Stepp Commercial, we market properties based on upside potential and long-term investment strategies that include steady growth and appreciation for the investors.”

For buyers looking for opportunities in Santa Monica, Stepp focuses on long-term investment strategies in the market. “We share the long-term benefits of appreciation, as well as upgrading units to meet the demands of today’s residents and secure maximum rental rates,” she says. For owners willing to bring an asset to market, Stepp finds that most are trading out of the asset class altogether. “For sellers, we focus on the current return on their investments and share long-term investment strategies specific to their individual investment goals,” she says. “For example, some sellers of apartment assets are looking to eliminate their management-intensive assets and trade into a NNN property which offers a passive, cash-flowing investment; no landlord responsibilities; and no additional expenses as the tenant covers the costs to maintain the asset.”