Los Angeles Multifamily Rents Hit New Highs for 2017, Class B/C Vacancies Decrease
Los Angeles remained one of the more sought-after multifamily markets in the U.S. during 2017, as rent growth and investment volume ranked near the top nationally. The vacancy rate also remained low, despite an influx of new supply, and demand for additional housing remains high. The local economy has recovered from the recession, although high housing costs and restricted in-migration may slow expansion.
According to data from Reis, the average asking rent for multifamily properties in Los Angeles finished 2017 at $1,883/unit, up 5.5% from $1,785/unit at the end of 2016, and has risen in every quarter since Q2 2010. The asking rent for Class A properties was $2,479/unit, up 5.4% for the year, while Class B/C rent rose 5.1% to $1,575/unit. The highest rent among submarkets was Marina Del Rey, at $3,242/unit. Reis forecasts overall asking rents in Los Angeles will grow 4.3% during 2018 and slow to 2.1% by 2022.
The Los Angeles vacancy rate remained among the lowest nationally, finishing 2017 at 3.3%, and has remained essentially unchanged since 2012. The Class A vacancy rate, driven by new high-end completions delivered to the market, increased to 5.5% from 5.3% one year ago. Vacancy in Class B/C properties was 2.2%, an improvement from 2.4% one year ago. Hawthorne had the lowest submarket vacancy rate, finishing the year at 0.9%. Reis forecasts that the overall vacancy rate for Los Angeles will increase to 3.8% during 2018; however, an influx of new supply is predicted push the rate to 4.5% by 2022.
A total of 6,200 new multifamily units were added to the market during 2017, the highest annual total since reaching 17,100 units in 1990. A projected 11,700 new units are expected to come online during 2018.
Although high housing costs remain an issue in the region, nearly all of the new multifamily development has been in Class A buildings. According to estimates from the Harvard University Joint Center for Housing Studies, Los Angeles needs 382,000 new housing units just to serve the area’s extremely low-income renters.
Development activity has concentrated in the Downtown submarket, where more than 2,100 units were delivered during 2017, and where the most units remained under construction at year-end.
Absorption totaled 5,900 units for 2017 — falling short of the 2016 total of 6,900 units — and is expected to reach 7,600 units in 2018.
The Los Angeles multifamily investment market remained steady during 2017, as prices increased and cap rates remained low. Data from Real Capital Analytics (RCA) showed that the year-end sales total was $6.9 billion, the third highest total in the nation (although lower than the $7.0 billion recorded during 2016). The highest annual total on record was $7.3 billion during 2015. Foreign investment accounted for $335.5 million of transaction volume during 2017, with Canadian investors leading at $273.1 million.
The average cap rate for 2017 Los Angeles multifamily transactions was 4.2%, essentially unchanged from 2016. The most recent high was 6.0% during 2009. In comparison, the U.S. cap rate was 5.6%, down from 5.7% one year ago.
The RCA Los Angeles Apartment CPPI™ increased 12.3% during the year, compared to 14.6% one year ago and 10.6% for the U.S. overall.
The Los Angeles economy has recovered from the recession and has entered into an expansion phase. Healthcare, technology and entertainment sectors have all driven growth, though high housing prices and a high cost of living will restrict in-migration and future economic expansion.
According to the U.S. Bureau of Labor Statistics, employment in Los Angeles increased by 1.2% (representing 54,700 jobs) during 2017, lower than the 1.5% gain for the U.S. overall during that time. The largest gains were in the information (up 5.5%) and construction (up 4.8%) sectors, while the largest losses were measured in the mining and logging sector (down 2.9%). The unemployment rate fell to 4.1%, an improvement from 4.7% one year ago, and right in line with the U.S. overall rate of 4.1%.