LA multifamily investors are rushing into more affordable markets: report

L.A. multifamily deal flow is shifting away from properties at the top end of the price spectrum and moving towards smaller, more affordable deals in the San Fernando Valley and Greater Downtown markets, according to a new report by commercial brokerage Marcus & Millichap.

Transactions in those two markets comprised more than half of closed multifamily transactions over the past year, the report shows. With average cap rates declining to the mid-4 percent range, the brokerage theorized that many smaller investors have moved into lower-priced markets in order to find value.

That’s especially true since they are having to compete with deep-pocketed, institutional players for premium assets in the supply-constrained Westside and in South Bay markets, driving prices up.

“Listings in these markets have remained highly constrained due to the rapid pace of occupancy and rental rate growth over the past few years, prompting existing holders to put off listing their assets,” the report says.

At the same time, L.A. clocked the quickest pace of development in over two decades over the past year, with 13,500 new units slated to be delivered by the end in 2016. By comparison, just 5,300 units were delivered in 2015.

The flood of new units is expected to result in increased vacancy rates by the end of 2016. Marcus & Millichap predicts 3.5 percent vacancy rates in L.A. County by year-end.

Meanwhile, the company predicts a 3.7 percent rise in rental prices to $1,962 per month as high home prices keep would-be buyers stuck in the rental market.