Refinancing Hurdles in L.A.'s Multifamily Sector

Uncertainty is at the forefront of just about all investments right now, whether that’s public trading or the multifamily sector of CRE.

Kamran Paydar, First Vice President of CBRE, spoke to those issues from a Greater Los Angeles perspective, which is the region he mainly focuses on when it comes to sales and development. He told GlobeSt that those with maturing loans are having issues getting a “favorable refinance scenario” in the multifamily sector.

“Some of these groups are faced with a loan that’s maturing, but the lender is saying it’s going to require you to put some money in for us to cast a new loan for you,” Paydar, who is one of the speakers at GlobeSt.com’s multifamily conference being held in Los Angeles in October, said.

“So that’s tricky. They may not necessarily want to put in the amount of cash that the new underwriting requires, and at the same time, they don’t want to be in the market where the activity has been subdued for as long as it’s been and their thought is, well, if a buyer is active right now, they’ll anticipate a lower price than what would be appealing for us if we could hang on a bit.”

Paydar further noted that high construction loan costs have scared companies away from acquiring or developing land.

That said, family offices are looking for opportunities, according to Paydar, and are trying to use the lack of competition to their advantage to get a transaction done at a favorable price point.

“That could be the exit for a seller who has unique motivations to transact in this environment,” Paydar said.

“And you have a shorter due diligence, you have certainty of closing. It’s on an expedited time frame. With that comes some element of a discount in pricing on the asset value, whether it’s land to develop or an existing building.”

Paydar said CBRE has endured some struggles with LA’s ULA tax that was first implemented in April 2023. The law requires commercial and residential operators who earn more than $5 million in sales to pay a four percent tax. And for anything over $10 million, the number gets boosted to 5.5 percent.

“That has had a tremendous impact on slowing down transaction volume,” he noted.

“That has stopped many sellers from putting their properties on the market to sell.”

While there are uncertainties in the multifamily market, Paydar said he is “bullish” on it rebounding. The expectation is that the Federal Reserve will target September for a rate cut for the first time since the onset of the pandemic. That could start boosting demand across not only multifamily – but CRE in general.

“Any incremental rate cut, I think, will be a wind in our sales,” said Paydar.

“We are hopeful for that to start to play out as early as next month, September, specific to the city of Los Angeles.”

The multifamily property expert further noted that renter demand, coupled with development slowing down and leading to less inventory -  could also give the sector a boost.

Plus, CRE participants are confident in California’s multifamily market re-surging. Of the respondents, 60 percent see multifamily demand outpacing the supply in the Northern part of the state in the coming years. And 57 percent think the same will apply to Southern California.