Apartment Demand Improving, but Higher Operating Costs Pose Near-Term Challenges — New Market Report
Los Angeles, one of the nation's most vibrant and dynamic cities, is witnessing noteworthy developments in its rental market. From changes in vacancy rates to shifts in demand across different neighborhoods, understanding these trends is crucial for both renters and investors. In this blog post, we'll delve into the latest updates and what they mean for the future of the Los Angeles rental market.
Positive Signs in Greater Downtown Los Angeles: Greater Downtown Los Angeles, including Mid-Wilshire and Hollywood submarkets, experienced a resurgence in apartment demand during the first half of 2023. Renters absorbed a net of 600 units, offering a ray of hope after three quarters of negative net absorption. With fewer new apartments in the pipeline for the near future, renters may find more options in existing units, potentially leading to reduced vacancy rates.
Lower Cost Suburban Rentals Thrive: Greater San Fernando Valley, one of Los Angeles' largest multifamily zones, has remained resilient over the past year. Vacancy rates here are notably lower than in Greater Downtown Los Angeles, Westside Cities, and South Bay-Long Beach. This is partly due to average rents being $250 to $1,000 per month lower than in other areas. Van Nuys-Northeast San Fernando Valley also stands out for having the lowest vacancy rate among U.S. submarkets with at least 40,000 units of inventory.
Construction and Inventory: Los Angeles continues to experience modest growth in rental inventory, with less than 1 percent expansion for the 18th time in the past 20 years. Despite this, Los Angeles leads major West Coast markets in terms of annual delivery volume. In contrast, vacancy rates in the city have increased by 60 basis points in the first half of 2023 but are expected to stabilize at 5.0 percent by year-end.
Rental Prices and Employment: Los Angeles is experiencing its third consecutive year of rent growth, although it remains the nation's sixth-most expensive apartment market, with an average monthly rent of $2,820. The metro's job market is robust, driven by hiring in health services-related fields, and is expected to continue growing at a rate of 1.1 percent annually in 2023.
Vacancy and Inventory Data: Over the past year, Los Angeles saw the vacant stock increase by over 20,000 units, resulting in a vacancy rate of 4.5 percent in June. While eight of the city's submarkets experienced significant vacancy spikes, only two areas, Brentwood-Westwood-Beverly Hills and Downtown Los Angeles, had rates above 5 percent. Developers added nearly 3,000 units countywide in the second quarter of 2023, marking the highest quarterly total since late 2021.
Rent Growth and Rental Classes: Rent growth was widespread over the past 12 months, with 19 areas noting increases, leading to an average effective rate of $2,803 per month. Class A and Class B rents each rose by 4.5 percent, while the Class C rate increased by 12.6 percent. Entering the second half of the year, the gap between luxury and mid-tier rent reached a record $880 per month.
Investment Highlights and Deal Flow: Deal flow in Los Angeles during the 12-month period ending in June experienced a 45 percent year-over-year decline. This decrease was not uniform across price tranches, with trading in the $10 to $20 million range slowing by just 20 percent. The implementation of Measure ULA, which imposed new taxes on real estate transactions exceeding $5 million, has affected deal flow, leading investors to target properties in South Bay and San Gabriel cities.
The Los Angeles rental market is navigating through changes in vacancy rates, rental prices, and deal flow. Understanding these trends and the factors driving them is essential for renters and investors alike. As the city's job market continues to grow, the rental landscape may see further shifts in the coming months. Whether you're a renter looking for the right neighborhood or an investor seeking opportunities, staying informed is key to making informed decisions in Los Angeles' dynamic rental market.