3 Reasons Hesitation Can Hurt Multifamily Sellers
Many expect a slowdown in transactions, but the opposite may be true, according to Stepp Commercial's Robert Stepp.
With the rising interest rate environment, many multifamily owners are not sure if they should sell or take a “wait-and-see” approach pertaining to their exit strategies. While every situation has different nuances, we advise our clients that it is always important to get ahead of the market, creating a strategy based on their specific wealth management goals. Often that means making a decisive, bold tactic, as opposed to hesitating.
Below are three reasons why hesitation on selling can have negative impacts on owners.
1. Low Market Inventory Benefits Sellers
Right now, in key markets such as the greater Los Angeles area, small- to mid-sized multifamily assets (less than 30 units) are in short supply. Faced with limited choices, there are a number of investors that are willing to pay all-cash or initiate a loan assumption to avoid high interest rates. Many of these buyers are in 1031 exchanges and are aggressively seeking to complete their upleg within the required timeframe. Sellers in low inventory markets may still have the upper hand on pricing, but the window is closing quickly.
2. Maturing Loans Will Force More Owners to Sell
We expect the amount of apartment inventory in 2023 to be higher than normal as many owners that are in interest-only and adjustable-rate mortgages will be forced to dispose of their assets. Due to higher interest rates, refinancing will no longer be an option for them. Larger numbers of inventory on the market will put downward pressure on sale prices in 2023.
3. Increasing Rent Control and Taxation Policies
Although rents are holding strong and vacancy rates remain low, owners of multifamily assets throughout California are increasingly threatened with new legislation, making it harder to effectively own and profit from real estate assets. Rent control efforts are not new; however, we are seeing a steady flow of new proposals for legislative action being introduced on a far-too-frequent basis.
Perhaps one of the most detrimental to date is Initiative Ordinance ULA (known as the “Mansion Tax”) for the City of Los Angeles. The measure, passed with 55 percent of the vote, levies a hefty transfer tax on both multifamily and residential property sales, ostensibly to fund homelessness initiatives. Beginning April 1, 2023, those selling properties between $5 million and $10 million will pay an additional 4 percent tax on the total price, and those selling properties over $10 million will pay 5.5 percent tax.
Staying Ahead of the Market
Over the past several years, we have been advising and preparing clients for this changing market and have been actively finding alternatives to sitting on the sidelines with little to no upside. Our clients who have exchanged into landlord-friendly out-of-state markets have seen average returns of 15 percent to 20 percent. Clients looking to remove themselves from the legislative climate in California have found Delaware Statutory Trusts to have increased their returns while eliminating time-consuming management responsibilities.
Our recommendation to those that are looking to dispose of their apartment assets is to get ahead of the curve and look at opportunities and options available to them sooner rather than later. With more inventory coming onto the market next year, and interest rates remaining high, the wait-and-see approach is likely not the safest bet.
Robert Stepp is principal, Stepp Commercial.