I got into real estate in the middle of a downturn, and I’ve worked in the industry through recessions and booms. It all began with my father sending me articles clipped from the L.A. Times about where the market would go, reminding me never to assume that anything in this business was permanent. For 30 years now, I’ve been a student of cycles. I took my dad’s lesson to heart, and this year, I’d like to share it with you, the inquiring rental owners and property managers of the greater Los Angeles area. Let’s talk about what’s to come in the next year and how it might affect each different type of rental owner.
It’s worth noting before we begin that even the experts predict markets incorrectly on occasion (just ask Edward Leamer, the UCLA Anderson Forecast Director who said, “No recession this time,” in the early months of 2008). But they’re right more often than they’re wrong, and as long as we don’t take their predictions as infallible, we can learn a lot from them.
If you own or manage single-family rentals in the L.A. area, you’re in a good position. Despite a slight drop in the number of home sales near the end of 2021, housing prices actually rose in December of that year. In L.A. County, Norada Real Estate Investments estimates that the median currently sits at $826,500. The California Association of Realtors has predicted a 5.2% increase in housing prices in 2022, making this year a time when owners can’t be faulted for finally selling.
However, although there might be a bit of turbulence with interest rates, I believe that single-family homes in the L.A. area should fare well in the long term. So if you don’t need to sell right now, don’t. A housing crisis like the one that occurred in 2008 is not on the horizon. People who own homes now have had to rigorously qualify to get loans, so the market isn’t in the same position it was then.
Multifamily also appears poised to remain on the incline. In fact, CBRE expects a record-breaking 2022 for the sector: “We forecast multifamily occupancy levels to remain above 95% for the foreseeable future and nearly 7% growth in net effective rents next year.” In light of these numbers, I believe that apartment owners and managers of multifamily buildings will likely continue to be rewarded after several difficult years of increased regulation and Covid-19-related hardship. In other words, unless you’re pressing to move capital out of state immediately, you should hang on. Additionally, make sure to invest in the turns of your vacancies, and don’t be conservative with upgrades. This way, you’ll make sure your properties are earning the highest market rents upon re-renting in rent-controlled environments.
In plain terms, 2020 and 2021 were rough years for the commercial real estate market, and you don’t have to have an MBA to understand why. With millions of people suddenly working from home rather than in traditional office settings, the demand for office-building real estate understandably suffered. Furthermore, e-commerce took a massive leap, which negatively impacted the market for brick-and-mortar retail spaces. Interestingly, this phenomenon that harmed retail helped industrial, making it a bright spot in the commercial sector.
A return to some degree of normalcy has shown that the decline in demand for office and retail spaces was overblown in reports, and J.P. Morgan predicts a year of growth for the overall commercial market in 2022. If you’re offered a longer-term lease with reasonable increases, you might actually be doing the safe thing to protect yourself in any potential future downturn. I’m in favor of these right now.
In summary, I believe that investors in California rentals don’t stand to lose ground in any property type for the rest of 2022. I tend to write these pieces for the long-term holding audience, and I don’t see any reason to jump ship now.
David Crown is the C.E.O. of Los Angeles Property Management Group, and has over twenty-five years of experience managing all types of income properties. A hands-on leader who has managed properties in 16 states, Mr. Crown has been asked to serve as an expert witness in property management matters, and currently serves on the Forbes Real Estate Council. He can be reached directly at 323-433-5254.