Not Every Deal Needs to be North of Wilshire

SANTA MONICA, CA—The Santa Monica multifamily market is in a class of its own. With steady low vacancy rates and ever increasing values, it is a market that most investors would like to penetrate; however, that isn't such a simple undertaking. The market is filled with generational investors and properties rarely come to market. To uncover the secrets of this somewhat enigmatic market, we sat down with Kimberly Roberts Stepp, a principal at Stepp Commercial and a Santa Monica market expert for an exclusive interview. Here, she tells all about the current state of the market, where investors should be looking to break in (hint: it doesn't have to be north of Wilshire) and where the market is headed.

GlobeSt.com: Give me a snapshot of the Santa Monica multifamily market.

Kimberly Roberts Stepp: Rents in Santa Monica are, on average, the highest in all of Los Angeles County. Additionally, there have been some significant multifamily trades this year that have drastically altered apartment valuation metrics in Santa Monica. These core assets traded in the beginning of the year along San Vicente, as well as on Ocean Avenue. It is not surprising to see a price-per-unit for quality properties in prime locations at around $500,000. The current Santa Monica multifamily marketplace is an anomaly though, and there is a noticeable trend in depreciation from cap rate levels and peak market pricing.

GlobeSt.com: Santa Monica has always been a top tier market in L.A. What continues to drive rental demand in this market?

Roberts Stepp: The Beach!  Santa Monica's proximity to the ocean, its influx of new tenants associated with the Silicon Beach revolution, and its general lack of product are all factors that drive rental demand. With that said, the overall apartment occupancy in the market is approximately 97%. 

GlobeSt.com: Santa Monica is one of the highest barrier-to-entry markets and has some strict rental control and development regulations. What should investors looking to break into this market know?

Roberts Stepp: I would say that they shouldn't be afraid of the up-and-coming areas in Santa Monica, especially near the freeway. Not every deal needs to be “north of Wilshire.” The best deals with the most upside potential are south of the 10 freeway. The trendiness of Main Street, the new Metro Line, and Silicon Beachers are helping to revive this area and it should not be shied away from—the opportunity for value is there. 

GlobeSt.com: Typically, what is the competition like for properties that come to market, and what types of investors are usually bidding?

Roberts Stepp: As there is a dearth of well-priced properties, those that are priced appropriately trade quickly, some within days. Sellers who believe their Santa Monica property is the pot of gold at the end of the rainbow, though, often find it languishing on the market for many months. 

Local investors who have a long-term or generational hold plan are the primary buyers in Santa Monica. Other buyer-types such as REITs and institutions shy away from Santa Monica deals due to the compressed capitalization rates seen in Santa Monica—the returns just don't fit their investment criteria. 

GlobeSt.com: What is your market outlook over the next 12 months? Do you expect this to continue to be a seller's market?

Roberts Stepp: Buyers are balking at the elevated prices and the inching up of interest rates has stifled most full price offers at 3 percent capitalization rates. In terms of this being a seller's market, yes, absolutely. However, in my opinion, in the next six to 12 months the wave will crest and we will start to see prices come into more realistic levels and owners will no longer have bragging rights about how they were able to sell at the peak of the market.