Los Angeles multifamily investment sales volumes ranked among the highest in the country last year. According to research from JLL, Los Angeles ranked third among major metros for investment sales in 2018, behind New York and Dallas. Sales totaled $7.5 billion dollars, a 36.3% increase over 2017 investment sales. The healthy local economy, including job and GDP growth, is driving the investment sales activity.

“The Los Angeles overall economy remains healthy,” Dana Brody, SVP at JLL, tells GlobeSt.com. “The area represents a large population center with nearly a quarter of the California’s population living in Los Angeles. The Los Angeles real GDP is expected to grow 3% this year. We have seen significant job growth in leisure and hospitality, Education and health services and professional services. The submarkets we are seeing this impact office leasing are in tech and media concentrated markets including Hollywood, Santa Monica, Playa Vista and the Westside. Low vacancy rates coupled with strong market fundamentals make the Los Angeles multifamily market very desirable to investors looking for a safe place to invest.”

The strong demand for multifamily product and low interest rates—which have stayed at historic lows—cap rates have compressed to 4% on average in core markets. “I see pricing remaining high and cap rates staying in the low,” says Brody. “There is simply not enough supply to keep up with demand, and combined with the growing investor interest in multi-family properties, there is too much capital chasing a few properties. Until there is an increase in supply, pricing will remain high.”

The investment activity, however, seems to be incongruent with investor sentiment. In the fall, investor sentiment began to turn with rising concerns about the maturity of the cycle and quantitative tightening. Despite the concerns, investor appetite and has remained strong. “Investors’ heightened focus on Los Angeles is supported by strong market fundamentals,” says Brody. “The L.A. market had a lot of room to grow, much more so than most real estate markets in the US, and we are seeing that there is still a demand from investors to have a stake in it despite rising prices and compressed returns.”

The housing market plays a significant role in the drive for multifamily product. In the last five years, Los Angeles single-family home prices have increased 40%. This has pushed more people into the rental market. “Home ownership in Los Angeles is far below the national average, hovering right around 50%, versus the 68% nationwide we saw at the peak of the market in 2005,” says Brody. “As a result, multifamily occupancy is currently near peak levels in the current cycle at 96.5%. The high barrier to entry for home ownership in Los Angeles has steadily increased over the last 5-10 years, creating a growing pool of renters that is renting for longer than we’ve ever seen before.”

This year, Brody expects investment sales to remain strong, and that trend should continue well into the future. “Low vacancy, a thinning development pipeline and potential increases in interest rates creating additional barriers to home ownership, I expect the Los Angeles multifamily market to remain strong and garner additional investor interest from across the country,” she says.