Southern California multi-family market performance

The Southern California multi-family market is well positioned and has done well in the first to
third quarter of 2022. Occupancy remains above average, and rent growth is high at 16%.

Here are some other performance facts of the multi-family market:

● The rental market has seen at least 10% growth since 2021.
● Sale activities in the Southern California multi-family market increased during the first
quarter, with around $3.6B worth of transactions.
● The vacancy rate in the multifamily market remains unchanged at 4.8%.
● The number of permits for new construction projects remains high, which means there
will be a steady stream of supply in the coming years.

One recurring trend since the pandemic is that the demand is shifting higher for rentals than
sales. This means more people are choosing to rent in the meantime while the mortgage rates,
home loan rates, and taxes are still very high and are expected to rise the following year still.
These are regular occurrences, and hopefully, as soon as the economy recovers, the demand
will shift in favor of home sales.

Multi-family market predictions

Will the multi-family market remain strong? The answer is still unknown. However, according to
macroeconomic forecasters, everyone must keep a close watch because the threat of recession
will become even more severe during the last quarter of 2022 until 2023. Fortunately, specific
indicators tell the multi-family market will stay afloat.

First, the rental rates have risen across Southern California by up to 19.8% and 16% across
other states, but the occupancy remains well above the long-term average. Renters are not
leaving, but the trend in demand seems to shift to less expensive markets in the country,
especially since work-from-home setup became available for specific jobs.

Next, new construction projects are underway to meet the higher demand for the rental of single
homes and multi-family housing. In Southern California, 50,086 units are currently under
construction in Los Angeles, Orange County, San Diego, and Inland Empire.

Will renters fill these new supply inventories? The answer is yes, but at a slow and steady pace.
Gross income growth will be slow but steady at 4.3%, which is still above the long-term average
goal of 3.6%. Finally, volume is expected to slow down to $450 billion by the end of 2022 due to
economic instability.

Takeaway

The entire real estate industry is currently in turmoil due to inflation, high taxes and rental rates,
and threats of recession. However, the multi-family market remains steady with new
construction projects underway. Still, macroeconomic forecasters warn investors to keep a close
watch even if the fundamentals are in place.

Sources:
Apartment Industry Enters Final Stretch of 2022 Facing More Headwinds Than Last Year. (n.d.).
CoStar News. Retrieved October 10, 2022, from
https://www.costar.com/article/1122451423/apartment-industry-enters-final-stretch-of-2022-facin
g-more-headwinds-than-last-year

Martin, E. J. (2022, September 15). 2022 Fall Housing Market Predictions. Bankrate. Retrieved
October 10, 2022, from
https://www.bankrate.com/real-estate/housing-market-predictions/#main-content

Southern California Multifamily Market Report Q2 2022. Avison Young. Retrieved October 10,
2022, from
https://www.avisonyoung.us/documents/14473326/14473583/Q2+2022+-+SoCal+Multifamily+M
arket+Report.pdf/0ddf1293-6502-8bf9-235e-9b55eb7c0388?t=1658858387749

2022 Midyear Multifamily Outlook. (n.d.). Retrieved October 10, 2022, from
https://mf.freddiemac.com/research/outlook/2022-midyear-multifamily-outlook#main-content

2022 Midyear Multifamily Outlook report. Retrieved October 10, 2022, from
https://mf.freddiemac.com/docs/2022-multifamily-midyear-outlook.pdf

While the inventory continues to meet the demand, there’s no telling what the real estate trend
will be in the coming years as the economy continues to tackle inflation and rental rates go up.
In the meantime, the oncoming third and fourth quarter terms of 2022 remain stable according
to outlooks, and the fundamentals are well in place to keep the market afloat for now.

Here’s a closer look into the current multi-family market and what the trends are indicating.

The multi-family rental market remains stable

At the beginning of 2020, the Southern California multifamily market has shown very strong
growth, an increase of around 10-20% according to Freddie Mac’s 2022 midyear multifamily
market outlook. This is a good number but did not last long as growth started to slow down in
2022, and gross income growth is seen to decline from 4.8% to 4.3% by 2023.

The fundamentals are currently well in place to keep the market stable, including a stable labor
market, inventory meeting the demand, and a favorable gross income growth rate. However, a
threat of recession could easily alter the balance of these elements.

New projects are underway

Developers see an increased shift in demand for the multi-family market instead of single-family
properties. New residential apartment complexes and buildings are being constructed, adding
some particularly high-class inventory. There are currently 50,086 units under construction
across Southern California. Areas under the construction pipeline include Los Angeles, Orange
County, Inland Empire, and San Diego.

Southern California developers are actively seeking smaller segments where there is less
competition and more opportunity for obtaining economies of scale. The pandemic has also
brought about this new trend of working from home, which spread the demand to the less
expensive secondary markets in the outskirts of cities and urban areas.

The inventory continues to keep pace with the demand for rental units despite the 5-10%
increase in unit rental rates in the coming quarters.

Higher rental rates expected

The market continues to observe a strong recovery in the apartment and multi-family rental
activities, steadily filling-up vacancies. Vacancies in Southern California have fallen by 40.7%
since the first quarter of 2020 (pandemic factors in consideration).

While this is good news for owners and investors in multi-family properties, there is looming bad
news for renters. An expected increase in rent due to higher taxes is expected in the last quarter
of 2022 and beyond.

<h2

Higher interest rates result in rental hikes, expected in the oncoming third quarter. The total
average rent in Southern California today has increased by 19.8% since the pandemic,
equivalent to around $2,350 per unit.

According to Bankrate, the housing market won’t see significant growth for the remaining quarters of 2022. There is a threat of a housing bubble and fluctuations in supply and demand.
Whether there will be a market crash is still unknown.

According to some market experts, given the current factors, there should be no radical
changes in the coming months, and a decline in some aspects of the market would not change
the long-term growth average. However, buyers are still very cautious about the climate
affecting both the employment field and rental prices – factors that could make their investment
unsustainable if they are not careful.

Takeaway

The Southern California multi-family market enters the last quarter of 2022 with small but steady
growth, giving apartment owners and developers a chance to recover from the pandemic woes
slowly. However, current inflation and the threat of recession have made buyers and renters
cautious in their investments. An impending increase in taxes will result in a rise in the rental
rates, which may affect net absorption, but should not affect the long-term gross income growth
rate.

Sources:

Apartment Industry Enters Final Stretch of 2022 Facing More Headwinds Than Last Year. (n.d.).
CoStar News. Retrieved September 23, 2022, from
https://www.costar.com/article/1122451423/apartment-industry-enters-final-stretch-of-2022-facin
g-more-headwinds-than-last-year

Martin, E. J. (2022, September 15). 2022 Fall Housing Market Predictions. Bankrate. Retrieved
September 23, 2022, from
https://www.bankrate.com/real-estate/housing-market-predictions/#main-content

Southern California Multifamily Market Report Q2 2022. Avison Young.Retrieved September 21,
2022, from
https://www.avisonyoung.us/documents/14473326/14473583/Q2+2022+-+SoCal+Multifamily+M
arket+Report.pdf/0ddf1293-6502-8bf9-235e-9b55eb7c0388?t=1658858387749

2022 Midyear Multifamily Outlook. (n.d.). Retrieved September 23, 2022, from
https://mf.freddiemac.com/research/outlook/2022-midyear-multifamily-outlook#main-content