2023 was an interesting year for the LA Multifamily industry to say the least.
As we bid farewell, we wanted to reflect on a few of the significant events which have impacted our industry both locally and nationally. This year we saw continued elevated interest rates, numerous legislative changes, and other major challenges faced by investors. Below is a re-cap:
A Year of Choppy Waters
- The Problematic Interest Rate Environment Continued: This year the Fed pushed interest rates to a 22-year high in a historically short period of time. Not since the 1980s have U.S. central bankers lifted borrowing costs in a single tightening campaign by more than 4 percentage points. Higher borrowing rates for investors created a problematic environment as far as new acquisitions and re-financings are concerned.
- Low Multifamily Sales Volume Followed: The higher interest rate environment (along with the impact of the LA Mansion Tax) contributed to paltry investment sales volume when compared to recent years, due primarily to the elevated cost of capital. Across the greater Los Angeles multifamily market, sales were down approximately 65% when compared to 2022.
- LA Mansion Tax Remained Intact: In October, a court ruling dismissed a challenge to Measure ULA which imposes an additional transfer tax on properties sold in LA City to fund affordable housing and address homelessness. The tax is calculated as 4% on property sales over $5 million and 5.5% on property sales over $10 million, applied to properties located in the City of Los Angeles. Sales volume for deals $5M+ suffered as a result.
- CA Updated Their ADU Laws: Two New CA ADU Laws were signed this year: AB 1033 enables property owners in select cities to construct Accessory Dwelling Units (ADUs) on their property and sell them independently, similar to condominiums. AB 976 permanently extends the ability of property owners to build rental ADUs while removing owner-occupancy requirements.
- The Property Insurance Dilemma – Here to Stay: Major Insurers, facing significant financial losses, have continued canceling existing policies (for mostly older properties) or pulling out of California entirely, which made obtaining insurance incredibly difficult and wildly more expensive for operators. NOI, Cash flows and profitability suffered as a result.
- The Rental Market Showed Signs of Softening: If you are having trouble leasing your vacant units, you may not be alone. During November of this year, average asking rents on a per-square-foot basis declined by 0.3% in Los Angeles. This follows 0.5% and 0.3% declines in September and October, respectively. Compared to the same time a year ago, rents have moved sideways, up only 0.1% compared to Nov. 30, 2022. After a low in December 2022, rental rates saw modest growth through the summer before momentum faltered.
- The State and Local Regulatory Environment Persisted: The City of Los Angeles reduced the 7% allowable increase to a 4% after four years of a city-wide rent freeze for rent-stabilized properties. Other major regulatory bills were announced such as The Justice for Renters Act, which could eliminate the statewide ban on rent control (Costa Hawkins), and ACA 1 which may directly challenge Prop 13’s taxpayer protection by lowering the voting threshold required to pass these local special taxes and bonds.
- Utility Costs Surged: Nearly everyone (on both the tenant and landlord side) has seen or felt an increase in utility costs. SoCalGas bills up at the onset of the year were up nearly 3x before normalizing towards the middle of the year. LADWP was not far behind with rate adjustments on water usage, impacting residential customers and leading to higher bills.
As we conclude this year-end wrap-up, it is evident that the LA real estate landscape has faced a myriad of challenges in 2023. Simply put, it has not been an easy year. From legislative changes and legal battles to market dynamics and elevated interest rates, property owners and landlords have certainly navigated complex terrain. Looking ahead, many believe that we have experienced a bottoming-out and that 2024 looks promising, all things considered.
