Multifamily investment activity is starting to rebound in Santa Monica. After the initial shuttering of the economy due to the coronavirus pandemic sparked a near halt to investment activity, investors have begun to transact again in recent months—but the return to the fold has come slowly in the Santa Monica market.
"We have been seeing market activity tick upwards in the past few months as investors are beginning to find some footing in our new reality. Volume is certainly down significantly from 2019 levels," Kimberly Stepp, a principal at Stepp Commercial, tells GlobeSt.com. "To illustrate: in the first half of this year, multifamily property transaction volume in West Los Angeles and Santa Monica was approximately $126.8 million as compared to $205.6 million in the first half of 2019. At this point, we are not seeing the large discounts that buyers have been anticipating, however, as compared to pre-COVID, asking prices are roughly 5% less, and cap rates are up by approximately 500 basis points. Finally, class-A properties on the Westside remain highly desirable and consistent with pre-COVID metrics."
Sales inventory is the main reason that investment activity hasn't rebounded. Many owners have decided to wait out the market uncertainty. "Overall, inventory is fairly low, suggesting that many owners are still taking a wait-and-see approach," says Stepp. "Of those who are selling, many are smaller mom and pop owners and family offices who were already fatigued with property management and ever-increasing city and state regulations, even before the COVID-induced eviction moratoriums and softening market rents. Many are long-term owners who simply want to move their considerable equity into low-maintenance, less-regulated investments rather than waiting for prices to return to pre-pandemic levels. We have been trading some of our clients out-of-state and expect that trend to continue."
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Buyers, however, are also cautious in this economic climate as well. Santa Monica's multifamily fundamentals have deteriorated in the current market, and that has changed the buying pool. "Interest on the buy-side is driven by the need to find sensible investment vehicles for pent-up capital," says Stepp. "Although vacancy rates are up to 6.1% and rents are flattening or decreasing, rent collections in Santa Monica and West L.A. remain strong at approximately 93 percent as of August 1. The buyers who are active are taking advantage of extremely low interest rates coupled with mild price discounts, and are looking to hold long-term."
The federal government's response and additional rent and unemployment relief will play a crucial role in the market performance later this year and into 2021. "Beyond COVID-19, what remains to be seen is how state and federal governments respond to the needs of the rental market for both tenants and housing providers," says Stepp. "The November election could have a strong impact on the market, but for those willing to take the risk, there could be significant gains over the long run."
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Kelsi Maree Borland
