Q3 2024 Multifamily Market Update: What Investors Need to Know
As we enter the final stretch of 2024, the multifamily real estate market in Los Angeles and San Bernardino counties is undergoing notable shifts. In this quarterly update, we’ll dive into the key metrics driving the market, from cap rates to sales volume, and help you understand what this means for you as an investor or property owner.
Whether you’re contemplating a new acquisition, evaluating the sale of your existing property, or simply keeping an eye on the market, these insights will provide a roadmap to navigate today’s multifamily landscape.
Investor Sentiment is Shifting: What’s Behind the Optimism?
After years of market volatility due to rising interest rates, inflation, and increased costs, investor sentiment is finally improving. Over the past year, we’ve seen more deal flow and increased sales volume across the multifamily sector. While interest rates remain higher than the pre-pandemic lows, they’ve come down from their recent peaks, bringing a wave of renewed optimism to the market.
Investors have adjusted to the “new normal,” accepting that while the high-flying days of rock-bottom interest rates are gone, there are still strong opportunities for cash flow and long-term appreciation in multifamily properties.
Cap Rates Are Up: What Does This Mean for Property Values?
One of the most significant trends this quarter is the rise in cap rates. In some areas, we’re seeing cap rates as high as 6%, which was unheard of just a few years ago when rates hovered around 4%.
This increase in cap rates is a double-edged sword. On the one hand, higher cap rates translate to better cash flow for new investors. On the other hand, existing property owners are seeing a downward pressure on property values, particularly in highly competitive areas.
Interest Rates: A Mixed Bag
Recent moves by the Federal Reserve to lower interest rates have given investors a glimmer of hope. However, it’s important to remember that commercial loans, particularly those tied to multifamily properties, are more closely aligned with the 10-year Treasury yield than with the Fed’s short-term rate cuts. While we’ve seen a slight drop in commercial lending rates, it’s unlikely we’ll return to the ultra-low rates of recent years anytime soon.
Still, for seasoned investors with a strong track record, today’s interest rates—hovering between 5.75% and 6%—are significantly more favorable than the 7.25% we saw earlier in 2024. This, combined with the rising cap rates, makes certain deals more attractive from a cash-flow perspective.
Vacancy Rates and Rental Trends: What You Need to Know
Vacancy rates remain elevated, particularly in densely populated areas where competition for tenants is fierce. Depending on the exact location of your property, you may notice it’s taking longer to rent units.
The data reflects this trend, with rents growing at a much slower pace than in previous years. While rent hikes of 10-15% per year were common during and immediately after the pandemic, wage stagnation and inflation are now keeping rents in check. At the same time, operating costs, especially for insurance and maintenance, are rising, putting additional pressure on landlords.
Prop 33 and Vacancy Control: A Threat on the Horizon
One of the biggest concerns for landlords right now is California’s Prop 33, which is up for a vote soon. If passed, it would give cities the ability to impose vacancy control, effectively limiting how much landlords can charge for a unit when a tenant vacates.
For investors in cities with existing rent control measures—like Baldwin Park, Pomona, and Pasadena—this could be a significant hit. If Prop 33 passes, the value of properties with low rents could drop by as much as 20% overnight. This would reduce the potential upside for buyers and put a strain on landlords looking to sell at current market values.
What’s Next for Multifamily Investors?
Despite the challenges, there are still strong opportunities in today’s multifamily market. Higher cap rates mean better returns for savvy investors, and with interest rates starting to inch down, financing conditions are improving. If you’re a buyer, now is a great time to look for deals, but it’s crucial to have a clear understanding of the property’s income potential and expenses before jumping in.
For landlords, the message is clear: be intentional with your portfolio. Whether it’s deciding to sell, refinance, or reposition your property, today’s market requires a strategic approach. Cap rates, interest rates, and local regulations all play a critical role in determining your next move.
Final Thoughts: How to Stay Ahead
The multifamily market is evolving, and those who stay informed will be best positioned to navigate these changes. Whether you’re a seasoned investor or a landlord with just a few units, staying ahead of trends like rising cap rates, evolving interest rates, and potential legislative changes is key to protecting and growing your investment.
At The Apartment Dealer, we are committed to helping you succeed. If you’re considering a sale or purchase, or simply want to discuss your current portfolio, reach out to my team. We’re here to provide you with the data and insights needed to make informed decisions in today’s market.
Until next time, stay informed, stay strategic, and keep an eye on those market trends!