Despite Rent Control, LA Attracts Outside Interest

As local buyer activity wanes, there has been expanded interest from young, aggressive investors without connections to the area, says investment broker Kimberly Stepp.
Kimberly Stepp  Image courtesy of Stepp Commercial

As a broker specializing in small- to mid-sized apartment assets in Los Angeles with a focus on Santa Monica and the Prime Westside, the market continues to remain strong as demand far outweighs supply for rental units. Los Angeles and its coastal areas attract a young, growing workforce seeking quality rental living with nearby trendy restaurants, shops and other convenient amenities.

Market slows as pricing reaches all-time high

Pricing and rents have slowed in their trajectory. That is largely due to the fact that over the past several years they grew to all-time highs and buyers and renters tapped the brakes as to how much they could reasonably justify. We have seen cap rates in prime areas remain extremely compressed with a number of them being in the low 3 percent range, so it is understandable when buyers really dissect a potential investment to identify value-add opportunities in today’s market.

Rent control uncertainly and opportunity

With uncertainty in the economy and the threat of stricter rent control measures statewide, the usual buyer pool of local investors has trailed off a bit. While rent control has been active on apartment assets built prior to 1978, the fight continues for more regulation despite the fact that the vast majority of multifamily buildings in Santa Monica and the prime Westside are rent-controlled.

Out of area investors seek value

As local buyer activity wanes, there has been an expanded interest by young, aggressive investor demographics from outside of the L.A. area – namely from New York City and San Francisco―who are seeking value-add opportunities and are familiar with rent control regulations as they are in their cities as well. Additionally, New York City and San Francisco apartment markets are seeing property valuations that are much higher than Los Angeles, so looking elsewhere in key coastal markets makes sense for them.

These out-of-area investors are capital-rich private offices and joint ventures that are seeking to capitalize on vacancy decontrol which can allow for generous upsides―once units become vacant, the rent can be brought to the current market rate, which is significant in rent-controlled areas like Santa Monica.

In conclusion

While the Los Angeles apartment market has slowed, opportunities to add value both long-and short-term remain and an expanded buyer pool is a welcome addition to this thriving region.