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  • Jason Tuvia

Undersupply of Apartments Drives Los Angeles Market

Los Angeles and the rest of Southern California’s apartment markets are soaring, taking advantage of tireless demand and the difficulty developers have building in the U.S. city with the highest percentage of renters.

Unlike many other regions where strong rental markets have set off building booms that have dragged down rent growth and increased vacancy rates, Los Angeles, San Diego and Orange County are seeing tight occupancy and steadily rising rents. Los Angeles, in particular, is bucking the national trend of slowing rent growth and declining occupancy, according to CoStar’s multifamily webinar for the first half of 2018, which includes a focus on Southern California.

"Despite the fact that more units are currently under construction in LA than at any point in the century, the vacancy rate is at its lowest level since 2006," says John Affleck, CoStar’s director of analytics. The multifamily vacancy rate in Los Angeles is 3.7 percent, a full 200 basis points lower than the national average. According to CoStar data, about 28,000 new units are under construction, equal to about 3 percent of the market’s total rental stock.

Still, Los Angeles is chronically undersupplied. And about 52 percent of residents are renters, which according to CoStar is the highest average in the country. But a scarcity of land, difficult permitting and a renewed call for rent control and affordable units makes adding units difficult.

Bob Champion, the founder and chief executive of Champion Real Estate Co. in Los Angeles, says apartment developments in Los Angeles face a particularly difficult slew of obstacles.

"The problem we’re having right now is that city and county elected officials are being pressured by advocates for rent control and by NIMBY constituents who feel additional development negatively affects services," said Champion, whose company has both developed and acquired apartment properties in the market. "And as a result it’s very difficult to get entitlements - and if you get entitlements you’re usually sued. As a result what should be 1, 2 years to get entitlements, takes 3, to 5 years here." Because of that undersupply, rent growth has surged in recent years. Los Angeles’ rent growth grew at 300 basis points higher at some points than the national average.

But as CoStar’s webinar points out, that pace is slowing, dropping to the 3 percent range, in line with the national average. But investors are still enthusiastic. CoStar estimates sales this year will match last year’s total of $180 billion. Dana Brody, a senior vice president at brokerage Jones Lang LaSalle said large institutional investors and real estate investment trusts are hunting for larger multi-property apartment offerings in the market. She expects rents to rise further.

"We’re undersupplied, in terms of multifamily options, and combine that with the fact that buying a home is nearly impossible," she said. "People are renting for longer and longer and that’s driving rents up."

CoStar’s analysts aren’t as sure.

"Our forecast model, however, suggests that the market will turn in the near term, as interest rates rise sharply while rent growth slows and vacancies rise," Affleck said in the webinar. But it’s true that after years of a bull run, most experts have jumped the gun on calling the peak of the cycle. "This is pretty drastic, and frankly wouldn’t be the first time we prematurely called the demise of the cycle."

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