The pandemic has significantly shifted dynamics in West Los Angeles’ apartment market. Once known as one of the highest-barrier-to-entry markets in the nation, the Westside is now a buyer’s paradise. Due to increased vacancy rates and low transaction volume in the last year, multifamily investors now have the upper hand in negotiations.
“Overall, West L.A/Santa Monica is one of the priciest rental markets in the Los Angeles area. Because of that, it was also the hardest hit from a vacancy standpoint as devastating job losses occurred as a result of the COVID crisis,” Kimberly R. Stepp, a principal with Stepp Commercial, tells GlobeSt.com. “A significant number of renters in these areas were forced to seek out other living arrangements like sharing an apartment with more roommates; moving in with family; or seeking less expensive/less desirable L.A.-area living locations. Some were primarily focused on a search of affordable / strong employment markets such as Phoenix, Nashville, Austin, Dallas, and other metros where there are also favorable tax advantages.
In 2020, transaction volume fell 44% year-over-year, a direct result of the change in leasing demand and overall fundamentals. This has had a dramatic impact on asset pricing. “Buyers won’t pay pre-COVID pricing and are looking for discounts on projected rent levels,” says Stepp. “They are seeking opportunities where owners are struggling to fill vacancies in order to capture a significant discount to the pricing of 12 months ago. With a surplus of available units on the market, it is safe to say that we are now entering into an attractive buyer’s market.”
This is only the beginning. Stepp is anticipating a wave of opportunities to hit the market this year, giving sellers even more encouragement to adapt. “I believe we will soon see an influx of apartment listings come to market as sellers choose to dispose of their assets now as opposed taking a wait-and-see approach,” she says. “For many landlords, and long-time owners especially, they don’t want to go through a slower than typical lease-up process. They have to deal with ever-increasing anti-landlord/rent control legislation and in anticipation of interest rates rising by mid-year, that time is of the essence. Many sellers will look to out-of-state opportunities in their 1031 exchanges that can potentially create a better position for them in the long-run.”
For investors willing to stay in California and navigate the challenges of the Westside market, there will be opportunities. “Ultimately, buyers will be able to be more selective with their acquisitions,” says Stepp. “Many deep pocket and cash buyers are waiting on the sidelines and 2021 has a good chance of being a year of opportunity. Patience is key when it comes to their expectations on opportunities to capitalize on stabilization and long-term appreciation on stressed seller opportunities.”
This year, the market will likely go through a transition as it adapts to new market fundamentals. This will likely mean some destabilization in the short-term. “2021 will most likely be a market of transition and opportunity,” says Stepp. “Vacancies will continue to be an issue for sellers, and motivation will be tested with the market conditions. Rent levels will come down and stabilize and pricing will follow.”