LA Apartment Sales Plummet 50% as Investors Confront New Taxes, Higher Costs
Every submarket saw an increase in vacant units and a decline in year-to-date sales volume in the second quarter. Construction, interest rates, eviction protections, also define 2023.
By Greg Cornfield August 1, 2023 7:15 pm
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Los Angeles’s housing landscape is experiencing the confluence of a slew of new era-defining changes taking effect this year, thus redefining the rental market for the city’s 3.3 million residents.
The number of units sold in the second quarter was almost 49 percent lower year to date than the same six-month period in 2022, according to a new report from NAI Capital, while the market continued to adjust to higher borrowing costs, pricier transaction costs and weaker demand. And higher interest rates and other region-specific obstacles will continue to dent the market.
“Investors have retreated from the market due to tight credit conditions and a disparity in prices between sellers and buyers, resulting in a transactional standoff,” the brokerage’s report said.
Further, L.A.’s implementation of Measure ULA — an additional 4 percent tax on sales or transfers of more than $5 million, and 5.5 percent on transactions over $10 million — has had a substantial effect on all types of commercial real estate activity. Indeed, sales volume for apartment buildings under the $5 million threshold was up a significant 40.5 percent in the second quarter of 2023 compared with the first, while sales for apartment buildings over $5 million plummeted by 75.2 percent.
“To avoid the tax burden, investors, developers and sellers rushed to close deals before the tax took effect on April 1,” per NAI Capital. “In the post-Measure ULA landscape, sellers will be hesitant to sell unless compelled to do so, and investors will avoid the market area due to the additional tax burden. However, some investors may still take a gamble, hoping for the repeal of Measure ULA in the future.”
The county’s apartment vacancy rate increased by 100 basis points compared to the previous year, reaching 4.7 percent, due to a surge in deliveries and the end of eviction protections.
Construction completions also increased 65.2 percent annually year to date, putting more units on the market. (Still, the number of units under construction dropped 8.3 percent.) Also, the overall number of vacant units has declined by 11.9 percent, or 7,500 units, compared to the second quarter of 2020, at the start of the pandemic, while 45,733 newly completed units have been added to the market over the same period.
Also, the lifting of state and local eviction protections this year led vacancy and rents to tick up in L.A. County. Many more landlords can now collect unpaid rent and evict tenants, some of whom have not paid for several years. In fact, Aug. 1 is the deadline for renters to pay any back rent due from March 2020 to October 2021. Some estimates show hundreds of millions of dollars owed to landlords.
Meanwhile, the average apartment rent still reached a record high of $2,165 per unit, representing a 0.8 percent increase from the second quarter from last year.
Gregory Cornfield can be reached at gcornfield@commercialobserver.com.
