Arbor Realty Trust Report Points to Positive Environment for LA Small Multifamily

Arbor Realty Trust’s “2019 Los Angeles Small Multifamily Investment Trends Report” takes a comprehensive look at the performance of small multifamily properties in Los Angeles. Click here for the report’s findings.

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The Los Angeles multifamily market is perfectly located at the intersection of global visibility and demand dependability. When overseas investors think of U.S. real estate, Los Angeles is one of the top markets on their minds. The demand for rental units is fueled by a strong housing market. Los Angeles small multifamily properties, defined as those with five to 49 units, have been a standout throughout the current economic expansion — and because lenders have taken a disciplined approach to financing these investments, the segment is likely to hold up well in the event of a market correction.

These were some of the conclusions highlighted in the 2019 edition of “Los Angeles Small Multifamily Investment Trends Report,” published by Arbor Realty Trust (ABR) in conjunction with Chandan Economics. The only small cloud on the horizon — and one that will affect the entire California multifamily market equally — is the effect of Assembly Bill (AB) 1482, a rent-restriction bill that Gov. Gavin Newsom signed into law in October 2019. The law goes into effect on January 1, 2020.

It is unlikely, however, that AB 1482 will substantially dampen the small multifamily market in Los Angeles. As the authors of the Arbor and Chandan report note, “In terms of severity, the rent capping appears to be relatively moderate, especially compared to other recent rent control measures adopted around the country.”

Acknowledging that the impact of regulations on asset pricing has created some uncertainty, the authors note that liquidity and property-level income are poised to remain strong positives. This makes the Los Angeles small multifamily market an attractive proposition for cashflow investors.

The Trends Look Positive

The Arbor and Chandan report paints a picture of a market that is performing well, especially compared to its small multifamily counterparts around the country. Among the trends it highlights are:

• – Rents: Since 2016, rents for Los Angeles small multifamily properties have risen every year between 4.7 percent and 5.5 percent and are likely to reach 5.6 percent for 2019.
• – Cap Rates: Through the third quarter 2019, Los Angeles small multifamily cap rates were averaging 4.8 percent, compared to 5.2 percent and 6.0 percent for overall U.S. multifamily and U.S. small multifamily, respectively
• – Loan–to-Value (LTV) Ratios: LTV ratios on small multifamily properties in Los Angeles have remained remarkably consistent, ranging from a low of 60.5 percent to a high of 64.7 percent between 2010 and 2019. At the end of third-quarter 2019, they were 890 basis points (bps) below the national average of 72.2 percent, reflecting a conservative approach to financing these properties.

Los Angeles small multifamily properties have consistently outperformed their peers nationwide, but because lenders have been more cautious, there are no signs of a speculative bubble. With demand holding steady, this segment is likely to be resilient to any downturn.