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Supply Issues Drive Southern California Multifamily Investment Volumes Up 43%

At least one corner of commercial real estate in Southern California is starting to make a comeback in 2021: Investment volume in 2021 eclipsed the first four months of 2020, according to CBRE data.

Downtown Los Angeles

Retail, industrial and office are attracting capital, but multifamily received the most attention from investors as the state struggles to increase its housing stock.

Investment volume in the sector reached $4.2B in the first four months of 2021, surpassing $2.1B and $3.4B spent in the same time period in 2019 and 2020, respectively. Overall, multifamily made up 43% of total investment volume through April of this year.

That’s up from 2019, when multifamily investment in Ventura, Orange, Los Angeles, Riverside, San Bernardino and San Diego counties accounted for roughly 29.7% of investment volume over the same period. 

CBRE Executive Vice President and co-head of the Southern CA Multifamily Institutional Group Dean Zander, who represents private capital and institutional owners, said he has seen significant demand for multifamily from investors this year so far.

He attributes the spike, in part, to the difficulty of developing new multifamily housing stock and the anticipation that more stock will not be delivered quickly enough to meet demand. The amount of capital attempting to deploy into the multifamily sector is as high as he's ever experienced in his career, he said.

Zander said there has also been a boost to the Southern California multifamily market from a state bond program through the California Statewide Communities Development Authority that allows eligible buyers to purchase multifamily properties to create housing for residents making between 80% and 120% of the area median income, which varies county to county. Renters who fall within this range make too much to qualify for low-income affordable housing but often not enough to afford market-rate rents.

Zander said he has seen “virtually zero distress” in the multifamily market in Southern California. 

Avison Young Head of U.S. Multifamily Capital Markets Peter Sherman said that he has “unequivocally” seen a rise in interest in multifamily in Southern California, especially compared to the pandemic-affected part of 2020 that preceded it. 

Sherman said after negative rent growth in most of Southern California over the last year, new growth in rents in the region plus attractive acquisition financing and “tremendous liquidity and demand” from the investor side of the market is contributing to the increased interest in investment sales, and a hint of a return to normalcy.  

“What has really started strongly now in the last couple of months is likely going to continue in a similar fashion through the end of the year,” Sherman said. 

The total dollars spent on investment sales in the five-county region reached $10B in the first four months of the year, representing a 19% increase over the same period a year ago but a 25% drop compared to 2019’s $11.5B investment volume over the same period.

Investment dollars spent on office properties this year through April was just $1.6B, lower than the $1.9B spent over the first four months of 2020 and roughly half of the $3.3B spent in the first four months of 2019. 

Fluctuations between total sales dollars spent on industrial year-over-year for industrial and retail assets were less pronounced. $3.2B in industrial assets changed hands through April of this year — more than the $3B spent in 2020 but less than the $3.7B spent in early 2019.

Retail assets across the five counties received the smallest share of the investment volume pie for the last three years, accounting for $1.1B in investment volume between January and April 2019, $1.3B during that time in 2020, and just $900M through April of this year.