LA Multifamily Landlords Fighting $3B In Potential Distress As Renter Protections End

As pandemic-era renter protections in Los Angeles come to an end, owners of the city's distressed multifamily properties are counting down the days until a combination of rent increases and lower interest rates can help them find more solid financial footing.

Apartments accounted for about $433M of LA's total $4.2B outstanding commercial property distress at the end of 2023, with owners fighting off another $2.9B in potential distress, according to MSCI data.

“A lot of people are waiting for that distress. They waited for it last year too, and it's just not happening,” Colliers Mortgage Executive Managing Director Shahin Yazdi told Bisnow. “What we're seeing is that lenders are just more amenable to helping borrowers.”

Lenders willing to work with borrowers and borrowers digging in to keep their properties are keeping potential distress in the Los Angeles market from becoming actual, outstanding distress, multifamily experts say.

There are also kernels of optimism in the market.

The Feb. 1 end of pandemic-related renter protections is one contributor to that optimism, Yazdi said. 

“What's given a lot of borrowers hope is that the Covid restrictions have finally been lifted and they can finally increase rents,” Yazdi said. 

The city of Los Angeles and the county voted to resume regular rent increases in rent-stabilized units beginning in 2024, and this week was the deadline for the last of back rent accrued due to the pandemic to be repaid in the city of LA. 

Another element giving owners hope is a much-awaited interest rate cut from the Federal Reserve. The increase of interest rates crunched floating-rate borrowers, but with interest rate cuts on the horizon, many borrowers can see the light at the end of the tunnel. 

“You have resilient borrowers right now that are hopeful that this is a very transitory state. That the rates aren't going to stay this way forever and that the market won’t stay this way forever,” Yazdi said. 

Northmarq Regional Managing Director Vince Norris said he’s not only seeing lenders step up to work with these borrowers. He's also seeing rescue capital flow in or recapitalizations occur. 

New construction loans and bridge loans are where Norris sees distress, but bridge borrowers are not only finding their lenders willing to work with them, they are also securing rescue capital such as preferred equity or recapitalizing their properties. 

“Those short-term loans are high leverage with high interest rates. And in a market like SoCal where rents are either declining or flat, that math doesn't work anymore,” Norris said. 

New construction projects that came online recently and are wading through low or no rent growth plus higher interest rates are also feeling the crunch, Norris said. But they too are finding ways to get lenders to work with them.

The phenomenon of borrowers wanting to hold on and lenders coming to the table has been one contributor to low transaction volumes in the market, both Yazdi and Norris said.

Transactions in Los Angeles County and the city of Los Angeles dropped in 2023 compared to the previous year, in step with a national trend. 

Sales velocity in SoCal in 2023 was down 48% from 2022’s cumulative total and down 45% in LA County in the same period, according to data from Northmarq. 

“We haven’t seen many distressed transactions yet,” Northmarq Director of Research Peter O’Neill wrote to Bisnow in an email. “Southern California doesn’t usually have the booms and busts that other markets have.”