Interest Rate Fallout: Multifamily a Mixed Bag

Pulling out of the pandemic, the outlook on multifamily sales has been shifting throughout the San Fernando Valley.

One person attuned to this market is Daniel Withers, a multifamily expert at Matthews’ Encino office at 16501 Ventura Blvd.

Withers has been selling apartment buildings throughout L.A. County for 20 years, closing more than $1 billion in transactions.

“Most of my volume comes out of the San Fernando Valley,” Withers said.

In his view, the market appears to be cooling off.

“A year ago, we would have seven to 10 fully qualified heavily interested parties who were interested in buying a property,” Withers said. “Now it seems like half.”

Buyers are pumping the brakes, largely because of rising interest rates.

“Investors are waiting to see what happens,” Withers said. “There are deals getting done. Sellers are still getting historically high numbers for their properties. There’s not as many people kicking down their doors.”

Submarkets such as the west San Fernando Valley have seen 45 deals over last 12 months in excess of $630 million. This is happening in places such as Canoga Park, Chatsworth, Tarzana, Reseda and Winnetka.

“We’re seeing Tri-Cities, particularly Glendale and Pasadena as a whole,” Withers noted. “These standalone municipalities — people want to flock to those areas.”

According to Matthews data, there have been 125 transactions in the past 12 months in Glendale and Pasadena, in excess of $1.5 billion.

Withers just closed a deal involving 130 N. Olive St. in Glendale, which sold for $2 million.

Another hotspot is the North Hollywood, Valley Village and Valley Glen area, where 101 transactions during the past 12 months have totaled $350 million.

“If you’re looking at sheer volume, it’s North Hollywood,” Withers said. “The North Hollywood and Van Nuys area have had a lot of velocity.”

Some buildings there have sold at $300,000 per unit. The median of buildings sold in Van Nuys has been $3.5 million with 72 buildings sold and a total transaction value of $260 million.

These are all buildings with five units and up.

“I’m very optimistic about the market,” Withers said. “We’re going to see good rent growth in the coming months. As interest rates rise, it’s going to squeeze people who want to buy homes and it will have them stay at rental residential units.”

Meanwhile, many landlords are looking to upgrade their apartment buildings to reposition them for a sale. 

The one segment of the market that has become more difficult is developing new apartments.

“If you look at where construction costs are now, a lot of projects they’re trying to get off the ground, they’re tabling them,” Withers said. “They are either going to have to sell off their projects or sit on them.”

The multifamily development side has been hit with supply chain disruptions.

“Cost of lumber has gone up,” Withers said. “When they do get the supplies, it’s three or four months past due.”

Such complications are having a ripple effect, stalling projects which ultimately means more money for developers as they stand around and wait.

“As developers have to finish a project, they’ve got a construction loan with interest they have to pay with no income coming in,” Withers said. “They have to take an extension on the loan. The progress that these developers are seeing is very minimal.”

Withers believes these types of issues are here to stay.

“We don’t see that changing anytime soon,” he said. “The developers we’ve talked to say that it’s as bad as it has ever been.”

While the situation may be terrible for developers, it bodes well for existing apartment owners, even with the recent rise in interest rates.

“If you look at where the interest rates are today, they’re still pretty low,” Withers said. “For the last 10 years, they’ve been really spoiled (with low interest rates).”

Savvy landlords have been looking to upgrade their multifamily properties so that they can charge more rent. Such a plan may see a landlord offering a tenant $20,000 to move out. The landlord will vacate the building, then go in and add more value to the building.

“We’ve seen in some situation in prime locations tenants being offered $50,000 or $60,000 to leave,” Withers said. “They’ll empty the building and start spending a lot of money on those units.”

Withers said sales have been good throughout the San Fernando Valley. If any areas have been a bit slower it would be Sylmar, Mission Hills, Pacoima and Panorama City.