SoCal Multifamily Sales Pulse - April 17, 2022 - April 23, 2022

• 25 April 2022
• Mike Lembeck

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Here's What's Happening In The Market, Here’s What This Means For You

Rising Rates Push Housing Market to Inflection Point

Builder confidence and housing affordability continued to decline given the rapidly rising interest rates combined with higher construction costs and ongoing home price increases, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

The index shaved two points off of builder confidence in newly-built single-family homes in this latest reading.

In the construction financing world, rising rates make an already challenging development deal even more difficult. With construction costs rising, the addition of higher financing costs, could lead to a slowdown of real estate development and a pull back by developers, which would only increase the lack of supply of some commercial real estate, such as multifamily.

Developers will hope and argue for higher rental rates, but there is a limit to how much renters can or will pay.

Despite low existing inventory, builders report sales traffic and current sales conditions have declined to their lowest points since last summer as a sharp jump in mortgage rates and persistent supply chain disruptions continue to unsettle the housing market.

The Pulse of the Market

With inflation, rising interest rates, and bad performance in the Treasury market, the CRE Finance Council (CREFC) found that overall sentiment among its board of governors took a nosedive for the first quarter of 2022. 

One major concern is not just inflation but the potential for a so-called hard landing as the Federal Reserve tries to guide the economy. The Fed has already started to increase its target rate at which banks lend to one another overnight. From a near-zero range, the new target is between 0.25% and 0.50%. This affects commercial lending and, as such, the financing costs in commercial real estate.

One bit of good news is that board members didn’t see liquidity issues on the horizon and said there would be sufficient capital for borrowers to obtain financing.

Here are some numbers for you - The average monthly rent in Southern California reached a new high in the first quarter of about $2,150 a month, which is 10.4% higher than it was one year ago, and 12.9% above the rate when the world shut down for the pandemic in March 2020.

The median sales price per unit in Southern California rose 11.2% from last year to $300,000 per unit.

The number of vacant multifamily units in Orange County dropped 31.9% annually in the first quarter, while asking rent soared 16.8% to $2,463 per unit. The median sales price hit $340,625 per unit, up 12.4% year over year.

In Los Angeles County, the number of vacant multifamily units declined 37.6% compared to the first quarter of 2021 — the steepest drop in the region. Rent increased 7.5% from 2021 to an average of $2,084 per month. The median sales price per unit hit $365,523 per unit, up 10.1% year over year. There were 1,826 new construction projects that got underway in the first three months of 2022 — down from 3,418 for the same period of 2021, a 47% drop.

The Inland Empire, which posted healthy population growth and employment gains, had the largest rate of increase in multifamily construction, up 58.8% from a year ago. Inland Empire rent also surged 13.3% to an average of $1,928 per month and the median sales price grew 31.2% year over year – the sharpest in the region —to $196,783 per unit.

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