Category: Property Insurance

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Legislation Los Angeles Multifamily Prop 13 Property Insurance Rent Control

The Year-End Wrap Up

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.  

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Los Angeles Multifamily Property Insurance Rent Control

Informal Poll Reveals 3 Big Issues Faced by LA Apartment Owners

The Los Angeles real estate market is without a doubt experiencing seismic shifts that directly impact landlords. In our daily calls, we informally polled owners on the major headwinds they are facing in today’s environment. In no specific words, here is what they had to say:


Property Insurance

“My Property Insurance Was Not Renewed”: Perhaps the most common issue LA multifamily owners are facing currently is retaining and obtaining property insurance. Every week, we are hearing multiple accounts of owners whose insurance policies have not been renewed due to the age of their building – despite having not ever filed a claim.

“My Insurance Premium is Now 3x Last Year’s Amount”: It is no secret that insurers, facing financial losses, are cancelling existing policies with many exiting the California market entirely – making it more expensive to operate investment properties which can majorly effect a building’s Net Operating Income. Annual insurance premiums are on the rise, with many owners large and small reporting increases of 2x and even 3x their previous annual insurance premiums.


Rental Market Softening

“My Vacant Units Are Sitting”: Another issue permeating the LA market is the overall softness of the rental market. Some owners chalk it up to time of year, while others cite new supply and the overall economic climate as the rationale. Overall it seems as if owners are experiencing much fewer inquiries, tours and applications at the moment with vacant units sitting on the market for weeks and even months. Many have dropped asking rates and offered major concessions as incentives.

“There Is a Lot of Competition”: If you believe that the freshly-constructed building(s) down the street effect your rents, you may be correct. Over 11,000 market-rate units have been completed so far in 2023. These units are not being absorbed as fast as prior years. Apartment vacancy, currently at 4.9%, is up from 4.4% at the start of this year. Some of these properties are offering significant concessions such as eight weeks of free rent on a newly-signed, 16-month lease in certain locations.


Rent Control and Regulatory Environment

“The 4% Rent Increase Is Not Fair After 4 Years of No Increases”: It should be evident by now that the City of Los Angeles has zero issues placing additional burdens on landlords both large and small. As you may well know, LA City Council members approved allowable rent increases of 4% effective February 2024, after almost 4 years of no increases. Adding insult to injury, the aggregate back rent owed to Los Angeles property owners since the onset of the pandemic is estimated to be in the Billions.

“The Justice for What Act?”: Maybe you have heard, maybe you haven’t. There is yet another rent control measure hitting November Ballots this year (The Justice for Renters Act) which may have serious implications for property owners. This act could eliminate the California statewide ban on rent control (Costa Hawkins) allowing for the local government to help renters stabilize their rent and prevent higher increases year after year.

As indicated above, LA Landlords have much on their minds, facing a complex and evolving environment marked by a softening rental market, insurance challenges, and changing regulatory policies. Navigating these issues requires strategic planning and adaptability as property owners work to ensure the viability and profitability of their investments in the face of ongoing challenges. As always, we are here to be a resource for you. Please do not hesitate to reach out.

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Los Angeles Multifamily Property Insurance

Insurance for Apartment Buildings is a Huge Problem

Over the past few months, many of our Los Angeles Apartment Owner clients have reported receiving notices of non-renewals from their insurance companies.

What’s Happening?

  • The cost of insurance is out of control and many carriers such as Allstate and State Farm have stopped writing policies entirely in California.

  • Over the next few months one of the largest writers of apartments have started to send out non-renewal notices for apartments that were built prior to 1990.

  • Many of our clients have reported recent annual insurance premiums as being 2x and even 3x the year prior.

What it Means?

  • This is yet another blow for Los Angeles Apartment owners who have faced tremendous headwinds in the business over the past few years since the onset of the Pandemic.

  • As expenses (such as maintenance and insurance) continue to rise exponentially, and with rent revenues staying fixed for the past few years, the apartment business has become less profitable from a Net Operating Income (NOI) and cash flow standpoint.


Long Term Owners Weigh Their Options

  • The sheer volume of seemingly long term owners that I speak with on a daily basis who are now considering selling their properties is astounding. Many of them cite that the business no longer makes sense to them any more.

  • The silver lining for longer term Los Angeles owners is that many of them have little to no debt on their properties, in addition to having a very low property tax basis thanks to Prop 13. In other words, most folks’ backs are not against the wall.