Wildfires Sharpen Focus on LA Multifamily
The market's supply and demand imbalance and its effects are attracting investors, writes Stepp Commercial's Kimberly Stepp.
The devastating January 2025 Pacific Palisades and Eaton fires have significantly altered Los Angeles’ housing market. More than 16,000 structures were destroyed, displacing over 150,000 people. As these communities work to rebuild, the ripple effects of these fires are being felt throughout the region. A resident of Pacific Palisades myself, I’ve experienced firsthand how displacing fires can reshape one’s life. While my house thankfully survived, the overwhelming destruction in the area has left the community uninhabitable, and the rebuilding process is expected to take years.
Many of the most affluent wildfire victims are renting single-family homes, driving others to multifamily product, which has resulted in elevated rents and lower vacancy. These challenges are exasperated as most of the attention will be spent on rebuilding what was lost, deterring new apartment projects. The lack of available residential product in the Los Angeles market is poised to continue at least for the next five years during the rebuild.
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The prime West Los Angeles areas will likely have the most rental demand over the next 12 to 24 months. Local property managers and landlords have seen a strong uptick in inquiries, and rental listings are moving faster than ever due to demand. While the circumstances are unfortunate, this is a boost for property owners and investors that have been feeling the brunt of an elevated interest rate environment, macroeconomic shifts and local legislative actions. The mansion tax in Los Angeles and surrounding cities is one reason deal flow has been constrained, compounding the impact of higher financing costs.
With Santa Monica being the largest and most desirable coastal rental community within the Westside submarket, transaction activity totaled $205 million last year. This was moderate compared to the historical annual average of $332 million over the past decade. Further, as 2024 came to an end, apartment pricing averaged approximately $400,000 per unit, down nearly 30 percent from its early 2022 peak, with cap rates expanded to 4.75 percent to 5.25 percent. While the city’s rent growth has lagged slightly behind that of greater Los Angeles in 2024, average rental rates of $3,361 per month were nearly 50 percent higher than the regional average of $2,160.
The broader impact of the wildfires driving rents even higher this year has further reinforced the appeal of multifamily investments. Investors are looking to secure assets in high-demand L.A. locations, betting on long-term rental growth as the rebuilding process drags on. Additionally, the potential for a recession could lead to lower interest rates, providing a much-needed boost to the multifamily investment market and helping it gain momentum. For investors prepared to act, the current market presents rare and compelling opportunities for strategic deals that could offer a significant long-term upside in one of the country’s most resilient multifamily markets.
Kimberly Stepp is principal of Stepp Commercial.
