L.A. Multifamily Fundamentals Remain Strong, Sales Volume Up Slightly in Q1 2018

At year-end 2017, we took a look at the Los Angeles multifamily market. We noted then that Los Angeles stood as one of the stronger markets nationally, with low vacancy and high investment volume. As we look at results from the first quarter of 2018, market fundamentals remain strong, although signs of weakness continue to be observed.

Rental Market

According to data from Reis, the average asking rent for Los Angeles multifamily properties finished Q1 2018 at $1,898/unit, up 0.8% since the end of 2017, and has risen in every quarter since Q2 2010. Year-over-year, rent increased 5.5%, although that growth has begun to slow since peaking in 2015. Rent for Class A properties was up 5.0% year-over-year, while the Class B/C average rose 4.9%. Reis forecasts asking rent in Los Angeles to grow 4.3% during 2018 and slow to 2.2% by 2022.

Landlords continued offering concessions to attract new tenants, as the asking-to-effective rent spread reached $76/unit during the first quarter, 36% higher than the $56/unit spread measured one year ago. The average effective rent increased 4.2% year-over-year, while asking rent increased 5.2%.

The vacancy rate finished the quarter at 3.4%, slightly higher than the 3.3% rate reported both at the end of 2017 and one year ago, though vacancy remained among the lowest in primary markets nationally. Reis forecasts that the vacancy rate will increase to 3.7% during 2018, and climb to 4.4% by 2022.

Due to the high volume of new supply that has been added, vacancy fundamentals remained stronger at the lower end of the market. The Class A vacancy rate was 5.6% at the end of the first quarter, up from 5.1% one year ago, while Class B/C vacancy finished at 2.2%, an improvement from 2.3% one year ago.

Demand has also not been able to keep up with the pace of new supply, as over 1,000 new multifamily units were added to the market during the first quarter and absorption totaled only 780 units. The development pipeline remains active, as Reis forecasts more than 11,000 new units to come online during 2018, which would be the highest annual total for the market in nearly 30 years. Absorption is expected to reach 8,300 units for the year.

Sales Market

Momentum remained steady in the Los Angeles multifamily investment market during the quarter. Data from Real Capital Analytics (RCA) showed that sales volume totaled $1.8 billion during the quarter, slightly higher than the five-year quarterly average of $1.7 billion.

The average sales price during the 12 months ending in March was down 0.7% year-over-year, and 7.1% lower than the October 2017 market high. The U.S. overall average sales price was up 2.9% over the last 12 months.

The average cap rate over the past 12 months was 4.3%, essentially unchanged from one year ago, remaining lower than the U.S. overall cap rate of 5.6%.

The Los Angeles Apartment RCA CPPI™ increased 10.9% over the last 12 months, compared to 16.2% one year ago and 11.3% for the U.S. overall.