Multi-family investment activity in Santa Monica is beginning to recover. After the initial economic shutdown due to the coronavirus pandemic nearly paralyzed investment, investors have started trading again in recent months – but the Santa Monica market has been slowly returning.
“We have seen market activity spike over the past few months as investors begin to gain a foothold in our new reality. The volume has certainly decreased significantly compared to 2019. " Kimberly Stepp, a client at Quilt advertisingtells GlobeSt.com. To illustrate, for the first half of this year, the transaction volume for apartment buildings in West Los Angeles and Santa Monica was approximately $ 126.8 million, compared to $ 205.6 million in the first half of 2019. At this point in time, we are not seeing any major discounts from buyers However, compared to before COVID, we expected asking prices to be around 5% lower and cap rates to have increased by around 500 basis points. Finally, Class A properties on the west side remain highly desirable and are in line with pre-COVID metrics. "
Sales inventory is the main reason investment activity has not recovered. Many owners have decided to wait for market uncertainty. “Overall, inventory levels are relatively low, which suggests many owners are still waiting,” says Stepp. "Of those who sell, many are smaller mom and pop owners and family offices who were tired of property management and ever-increasing city and state regulations before the COVID-induced eviction moratoria and the weakening of market rents. Many are long-term owners who simply want to convert their sizable equity into low-maintenance, less-regulated assets instead of waiting for prices to return to pre-pandemic levels. We have traded some of our clients outside of the state and expect this trend to continue. "
But even in this economic environment, buyers are cautious. Santa Monica apartment building fundamentals have deteriorated in the current market, and this has changed the buying pool. “The interest on the buyer side is driven by the need to find sensible investment vehicles for pent-up capital,” says Stepp. “Although the vacancy rate is up to 6.1% and rents are flattening or falling, rental income in Santa Monica and West LA remains strong at around 93 percent as of August 1st. The active buyers benefit from extremely low interest rates in connection with mild price discounts and want to hold on for the long term. "
The federal government's response as well as the additional relief from rent and unemployment will play a critical role in market performance later this year and through 2021. "After COVID-19, it remains to be seen how the federal and state governments will react to the needs of the rental market for tenants and housing providers," says Stepp. "The November election could have a strong impact on the market, but for those willing to take the risk, there could be significant gains in the long run."