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CAP Rates for Apartment/Multifamily Properties in Los Angeles California

Multifamily Apartment Cap Rates
Rates as of: 07/19/2024
Description Cap Rate
Luxury Metro A Class 5.10
Luxury Metro B Class 5.15
Luxury Metro C Class 5.60
Suburban A Class 5.25
Suburban B Class 5.35
Suburban C Class 5.75
Value Added Acquisition 6.65
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Multifamily Apartment Cap Rates

 

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May 2024 Multifamily Cap Rate Report

Multifamily Cap Rates are Expanding

The good news for investors is that although inventories were still low during the first quarter of 2024, multifamily cap rates expanded 33 bps to an average of 5.40% which is a dramatic increase over the 44 bps expansion for the entire prior year according to CBRE. Multifamily cap rates expanded more slowly in 2023 from 4.63% to 5.07%.   Declining net operating income, due to increases in operating expenses and flat rent increases, has been responsible for the decline in multifamily property values for both years.   

According to CBRE, the main contributing factor has been the oversupply of 440,000 new apartment units in 2024 which is the largest in decades.  This has been slowing down rent growth dramatically. This is compounded by over 900,000 units that are currently under construction. With vacancy and concessions on the rise in A and B class properties, multifamily cap rates are expected to continue to expand through the remainder of 2024.

Fannie Mae states that “much of the growth in multifamily property values over the past two decades has stemmed from price appreciation, rather than from net operating income increasing.” This trend is slowing with cap rates expanding due to net operating incomes declining in 2023 and the first quarter of 2024. This has been the result of increased operating expense, especially insurance, taxes and the cost of labor for maintenance.  This has been exacerbated by flat rental growth.  For a decade through 2021, with the exception of the short covid recession in 2020, rental increases have more than offset inflation on operating expenses.   Rental increase in 2021 hit a record high of 13.5% which along with interest rates in the low 3% range allowed multifamily real estate prices to soar. Fannie Mae is predicting rents to only increase 1.5% in 2024, which is problematic since it is well below inflation.

Why You Should Invest with a Long-Term Hold Strategy Today

In summary, investing with a long-term hold strategy seems prudent today.  Where shorter hold periods of 4–5 years worked well through 2021, it is advisable to buy with a 6-7 year hold period.  Even with cap rates expanding, Return on investment (ROI) is at an historical low due to multifamily sales prices still being high due to ten years of historical low interest rates which ended in March of 2022. Therefore, this is a time of caution for investors who could be buying at the top of the market with high sales prices based on the low interest rates of yesterday.  This is not a time to buy a property based on the hopes of raising rents in a year. It might take many years to raise rents enough to raise your ROI where it needs to be.  My best advice is to wait until cap rates rise another 70 bps to invest.  And be sure to make your offer based on the current actual net operating income and not pro forma.   

October 2023 Multifamily Cap Rate Report

By Terry Painter/Mortgage Banker, Author of The Encyclopedia of Commercial Real Estate Advice, member of The Forbes Business Council

Multifamily Cap Rates are Expanding

The good news for apartment building investors is that multifamily cap rates have gone up slowly from the third quarter of 2022 to the third quarter of 2023 expanding 44 bps, from 4.63% to 5.07% according to CBRE. This has effectively lowered the average sales price on a $1 million property over the year by 8.8% or $88,000. As multifamily investors are welcoming lower sales prices, they are being hammered by rising interest rates that lower returns on their investment to unacceptable levels. Most of my borrowers are faced with having to negotiate a lower sales price or canceling the purchase after I size their loan and tell them they have to put 50% down. A year ago, this would have been 44%. At the beginning of 2022 our average multifamily borrower had to put about 35% down.

Multifamily Sales Volume and Loan Volume are Down

Multifamily sales volume and loan volume are at historical low levels. Cap rates need to rise a good deal more and interest rates need to come down before the commercial real estate market can recover. Rising interest rates that peaked at just under 8.00% at the end of October have collided with high multifamily prices further slowing down both purchases and loan originations. According to MSCI Real Capital Analytics, sales volume reached $89.6 billion through the first three quarters of 2023, which was considerably down from the $251.9 billion recorded during the same period of 2022.   According to the Mortgage Bankers Association, multifamily loan originations were down by 49% from the previous year at the end of the third quarter 2023. As a commercial mortgage banker, our multifamily loan volume is down by over 70% this year. 

 

Demand for Apartment Rentals is High

Multifamily cap rate expansion is being slowed by the high demand for multifamily rentals. High mortgage rates have pushed many would be home buyers into the rental market. According to Redfin, a home buyer now has to earn $114,627 annually to afford the medium priced home at $420,000. This puts their monthly payments 27% higher than rent on the average apartment. According to Cushman and Wakefield, demand for apartments for the third quarter 2023 was 89,280 units which was an 11% increase over the prior quarter but six times above last year’s third quarter increase of 13,000 units. This is also a result of economic strength in jobs and low unemployment.

Rent Growth is Down and Vacancy and Concessions are Up

High vacancy and slow rent growth are two metrics that historically have increased cap rates. This trend should create more cap rate expansion over the next year. According to Cushman and Wakefield, vacancy rates nationally have gone up over the past year from 6.5% to 7.8%. According to Fannie Mae, Annual rent growth through October of 2023 has decreased to 2.6% due to over 400,000 new units flooding the market out of the 730,000 new units expected to come on line in 2023. This is very low rental growth if you compare it with combined rental increase of close to 20% for 2021 and 2022. Most of the new supply of units were in high amenity A class complexes. This has effectively kept A class rental rates flat with high concessions. Rental concessions over all classes increased from 5.2% to 9.00% from a year ago. The average rental concession is one month free on a 12-month lease.

Should you Wait for Cap Rates to Go Higher to Purchase?

In my opinion, although cap rates have gone up, they are still unrealistically low when combined with today’s high mortgage rates, making investing risky. Ideally, commercial property values should increase based on rental growth, and not because low interest rates which bottomed out at 2.96% in December of 2021 made it possible. Sound economics just do not support today’s cap rates based on what investors need to earn. The average cash on cash return with 50% down is hovering around 4.20% after loan payments. Many of  my clients have told me they can earn 5.25% investing in CDs. Why should they buy rental property today with those numbers? And sure, many sellers and their real estate brokers will try to sell you in the operating memorandum that rents are under market. But are they with rental increases calming down? My advice is to wait until sometime in 2024 with the hope that interest rates will come down a lot along with sales prices. Hope that this additional time is not friendly to sellers who have to sell.  Over the past 26 years doing this job, I have made many loans on properties that came up for sale at lower prices due to loan maturity, economic hardship, divorce or death. 

                                                         

Sources

CBRE: https://www.cbre.com/insights/briefs/higher-rates-push-up-prime-multifamily-cap-rates-in-q3

Fannie Mae: https://www.fanniemae.com/media/49331/display

MBA:  https://www.mba.org/news-and-research/newsroom/news/2023/11/07/commercial-multifamily-borrowing-down-49-in-third-quarter-2023

Cushman and Wakefiled: https://cw-gbl-gws-prod.azureedge.net/-/media/cw/marketbeat-pdfs/2023/q3/us-reports/multifamily/us_multifamily_marketbeat_q3-2023.pdf?rev=951e0cd95c77403cbc6c67609f5e17b8

 

MSCI: https://www.msci.com/research-and-insights

Redfin: https://investors.redfin.com/news-events/press-releases/detail/987/redfin-reports-that-homebuyers-must-earn-115000-to-afford#:~:text=Press%20releases-,Redfin%20Reports%20That%20Homebuyers%20Must%20Earn%20%24115%2C000%20to%20Afford%20the,the%20Typical%20American%20Household%20Earns

 

 

 

DON’T FALL INTO THE CAP RATE TRAP

“Are you kidding me?” my client asked.  “You’re telling me that the property taxes are going up by $19,500 when the county reassess the property I’m buying based on the purchase price after I own it?”

“Yes”, I answered.  “In California they do that.” 

“Well then”, he said, “ that means I’m buying the property for a 4.70 cap instead of the 6 cap the listing agent said it was. That means I’m getting ripped off and the listing agent lied to me. Why would he put the seller’s lower property taxes in the list of expenses and calculate a 6 cap? This is the only property I’ve identified in my 1031 exchange.  What am I going to do?”     READ MORE

About the Los Angeles, California Real Estate Market in 2024

Apartment loans in Los Angeles. Apartment loan rates, multifamily

About the Hot Los Angeles Rental Market

­­­­­­­­­­­­­­­­­In the city of Los Angeles, California,  the house value median has increased to $677,400 in 2018. Los Angeles home values are on a steep rise – a gain of 8.7 percent in the last year. And there is a prediction that they will increase a whopping 12.1 percent in the following year. It is very unlikely to happen, but if the rate of this 2 year period were to continue for 7 years, real estate prices would about double.

This is a ridiculously high increase making housing less and less affordable. It also makes it more financially difficult to convert from renting a dwelling to purchasing a home.

Getting in the real estate market now for many people is like the race track dogs who chase the mechanical lure they never catch. It smells so delicious, but they can’t put their mouth around it.

It takes an aggressive savings plan to get into the housing market. Desire, strong will, and hard work are key ingredients to make it happen.

$508 is the list cost median per square foot in Los Angeles. The metro area of Los Angeles-Long Beach-Anaheim has a lower list cost median per square foot of $433.

$799,999 is the presently listed cost median of houses in Los Angeles. $699,900 is the cost median of houses that have been sold.

Rent costs are exceedingly high in Los Angeles and the Los Angeles-Long Beach-Anaheim Metro area. $3,550 is the rent cost median in the city of Los Angeles. The metro area of Los Angeles-Long Beach-Anaheim has a lower rent cost median which is $3,200.

These high rent prices are leveling off now because they are out of the affordability range of many people. This can give some relief to renters.

The rate of foreclosures is an important economic factor when it comes to real estate. A high foreclosure rate yields a lower real estate value for any particular location.

For every 10,000 houses in Los Angeles, 1.0 houses go through foreclosure. The metro area of Los Angeles-Long Beach-Anaheim has a lower foreclosure rate of 0.9. 1.6 is the foreclosure rate of the United States.

When home owners experience the following condition, they could very well be on the way to foreclosure. And that condition is called mortgage delinquency. What is mortgage delinquency? It is the condition of a home owner not making good on one or more mortgage payments on their home.

The value of houses dropped more than 20 percent in the United States as a result of the recession of 2008. This recession had such a negative effect on the value of homes that many homeowners are still underwater regarding their home mortgages. Being underwater on a mortgage has the meaning of the homeowner having a bigger mortgage debt than the value of their house.

5.4 percent of homeowners in Los Angeles are experiencing being underwater regarding their mortgages. The metro area of Los Angeles-Long Beach-Anaheim has a higher percentage of owners of houses being underwater on their mortgages, which is 5.6 percent.

Moving onto commercial real estate. There is a shortage of senior housing in Los Angeles, and this shortage is compounded by the lack of senior housing being located near public transportation. So many seniors need to be able to enjoy the freedom of traveling to many different locations. Movement is life.

Well, one Los Angeles project which will help meet this need is a development for senior housing of 70 units located next to Crenshaw/Slauson Station in Park Mesa Heights. This station is currently under construction. It is called the Curve senior housing project.

This development for seniors is to be a 52,777 square foot five-story building. What a gift it will be for the occupants – There will be 40 units for low-income seniors, and 29 units for very-low-income seniors. The remaining unit will be for the manager who will receive the unit at market rate.

The architecture is very interesting. It’s in the Art Deco style of the 1930s and 1940s – similar to the buildings of Crenshaw Corridor of the past.

In the area of this development, gentrification is taking place and housing is less and less available for those who live in the neighborhood and want to stay. When they get to retirement age, they face a serious shortage of senior housing in the area.

California is in the top 5 markets for those who want to invest in senior housing. There are a huge number of baby boomers retiring, and there are big challenges like the huge land costs, and the huge labor cost. There are now 1.5 million seniors in Los Angeles. By 2030 the retirement population is estimated to double to 3.0 million. And these retirement communities need to be near public transportation.

This current project, the Curve senior housing project will help give quality of life to some seniors as well as affordable housing.

The annual median household income in the city of Los Angeles is $55,909.

If you want a great source for learning about multifamily complexes to purchase in LA, click on https://www.theapartmentconsultant.com/

Apartment Loan Store is proud to serve the entire Greater Los Angeles area:

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U.S. National-Level CAP Rates and Expected Rates of Return by Property Type, Sector, Class and/or Segment

   

Stabilized Property Acquisitions

Value-Add Property Acquisitions

   
CAP Rate
 
AD Over 10-Yr Treasury
Expected Return on Cost 
 
AD Over 10-Yr  Treasury
Property Type
​Sector
Class/
Segment
H1 2017
(%)
H2 2017
(%)
Change
(bps)
H1 2017 (%)
EOP 1.49
H2 2017 (%)
EOP 2.45
H1 2017
(%)
H2 2017
(%)
Change
(bps)
H1 2017(%)
EOP 1.49
H@ 2017 (%)
EOP 2.45
Office
CBD
ALL 6.61 6.63 2 512 418 8.22 8.24 2 673 579
AA 5.19 5.24 5 370 279 - - - - -
A 5.95 5.99 4 446 354 7.12 7.10 -2 563 465
B 6.85 6.84 -1 536 439 8.02 8.03 2 653 558
C 8.61 8.64 3 712 619 9.83 9.8 6 834 744
Office
Suburban
ALL 7.64 7.76 11 615 531 9.21 9.33 11 772 688
AA 6.20 6.31 11 471 386 - - - - -
A 6.96 7.07 11 547 462 8.06 8.18 12 657 573
B 7.97 8.13 16 648 568 9.20 9.27 7 771 682
C 9.30 9.46 16 781 701 10.45 10.60 15 896 815
 
Industrial
ALL
ALL 6.72 6,73 1 523 428 7.71 7.74 3 622 573
A 5.48 5.54 5 399 309 6.34 6.41 8 485 396
B 6.59 6.52 -7 510 407 7.53 7.53 0 604 508
C 8.13 8.16 4 644 571 9.31 9.33 3 782 688
 
Retail 
Neighborhood
Community
ALL 6.94 7.12 18 545 467 7.92 8.14 22 643 569
A 5.62 5.66 4 413 321 6.59 6.85 26 510 440
B 6.83 7.03 20 534 458 7.81 8.00 19 632 555
C 8.39 8.68 29 690 623 9.36 9.58 22 787 713
Retail
Power
ALL 7.36 7.54 18 587 509 8.25 8.47 22 676 602
A 6.11 6.16 5 462 371 7.21 7.31 10 572 486
B 7.30 7.47 16 581 502 8.06 8.40 34 657 595
C 8.70 9.03 33 721 658 9.52 9.74 22 803 729
Retail
High Street
                     
A 4.23 4.37 13 274 192 - - - - -
                     
 
Multifamily
Infill
ALL 5.26 5.32 6 377 287 5.95 6.03 8 446 358
A 4.60 4.67 8 311 222 5.34 5.41 7 385 296
B 5.15 5.20 5 366 275 5.78 5.87 9 429 342
C 6.06 6.12 6 457 367 6.75 6.81 7 526 436
Multifamily
Suburban
ALL 5.67 5.74 7 418 329 6.33 6.45 11 484 400
A 5.01 5.10 10 352 265 5.62 5.71 9 413 326
B 5.53 5.61 8 404 316 6.16 6.26 10 467 381
C 6.48 6.50 2 499 405 7.22 7.37 15 573 492
 
Hotels
CBD
ALL 7.85 7.91 6 636 546 - - - - -
LUXURY 6.83 6.92 8 534 447 - - - - -
FULL SERVICE 7.55 7.62 8 606 517 - - - - -
SELECT SERVICE 7.94 8.01 8 645 556 - - - - -
ECONOMY 9.10 9.11 1 761 666 - - - - -
Hotels
Suburban
ALL 8.39 8.44 5 690 599 - - - - -
LUXURY 7.42 7.50 7 593 505 - - - - -
FULL SERVICE 8.07 8.14 7 658 569 - - - - -
SELECT SERVICE 8.46 8.53 7 697 608 - - - - -
ECONOMY 9.59 9.58 -1 810 713 - - - - -

 

 

 

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