Headwinds and highlights: A look at the Los Angeles market

By nearly all accounts, 2022 was a robust year for multifamily in metro Los Angeles, with a vacancy rate at near-record lows, the highest yearly sales volume in history, and a healthy YOY increase in average effective rents.

With its diverse economy and high barriers to development, Los Angeles has been a reliable market for multifamily investors for decades. The market continued to deliver in 2022, despite a slowdown in the second half of the year due to rising interest rates and economic uncertainty. L.A. multifamily recorded the highest yearly sales volume in its history, with $12 billion in sales, according to CoStar. The vacancy rate stood at 4.0 percent at year end, and asking rents increased by 2.9 percent for 2022, although they have moderated since reaching a peak in August 2022.

Demand will remain strong due to supply constraints fueled by development costs and a difficult permitting environment. There are currently 28,000 units in the pipeline, representing just 2.8 percent of existing inventory, well below the national average of 5.0 percent.

Legislation may present some challenges

Investors and owners of multifamily properties in L.A. are looking closely at several pieces of legislation to tease out possible impacts. For example, on April 1 of this year, Measure ULA (United to House L.A.) went into effect. Also known as the “Mansion Tax,” the measure is designed to address a range of housing insecurity issues. It imposes a 4-percent tax on residential and commercial properties sold for more than $5 million and a 5.5-percent tax on properties sold for more than $10 million.

Designed to generate funds earmarked to pay for construction of new affordable housing, the tax has some detractors. The combination of higher interest rates, rising construction costs, and the additional costs of the Mansion tax stretch thin margins even thinner, making development less attractive and slowing sales activity. It is possible that, instead of creating new avenues for affordable housing, the measure may have the effect of slowing down housing production. If that happens, less housing supply equals less affordability.

The picture for landlords is also challenging. L.A. has been in an eviction moratorium since March 2020, which extended until March 31,2023, along with a rent freeze for all properties subject to L.A.’s rent stabilization ordinance (RSO). Other renter protections went into effect in February 2023, including an update to an existing “just cause” eviction protection that prohibits landlords from evicting tenants there was unpaid “fair market” rent, documented lease violations, owner move-ins or other specific reasons and a provision that requires landlords to pay relocation fees if a rent increase of 10 percent or more forces a tenant to move. The relocation assistance will be three times the fair market rent of the unit (based on the HUD figures) plus $1,411 in moving costs.

Despite these legislative headwinds, L.A. will remain attractive to commercial real estate investors for the long term. There are a number of factors that will contribute to L.A.’s continuing vibrancy.

Learn more about them and about this exciting market when you download our semi-annual Multifamily Outlook report.