Foundational Long-Term Demand Drivers Overshadow Temporary Sector Flux
Most markets across the country are facing brief supply and demand imbalances as record construction coincides with economically hindered household creation. The outlook nevertheless remains bright, as single-family affordability barriers will delay the millennial flow to homeownership. Coupled with pent-up young adult household growth and rising immigration, the renter pool is positioned to expand.
Trio of downtown locations register positive momentum. Los Angeles County's apartment sector is showing signs of improvement, despite vacancy resting slightly above its pre-pandemic mark. During the first quarter of 2023, seven of 20 submarkets registered positive net absorption, the best ratio in a year. Three of these areas—Downtown Los Angeles, Mid-Wilshire, and Hollywood—comprise the CBD, indicating that some renters are returning to areas of higher density. This demand restoration comes at an opportune time as most of the 7,500 units underway in Los Angeles proper are located in these submarkets. Elsewhere in the county, only the cities of Long Beach and Inglewood had active pipelines that exceeded 500 units as of March, with metro inventory slated to advance by just 1 percent this year, despite the delivery of 11,000 apartments. This moderate stock increase and stalwart demand for lower-cost rentals will enable vacancy to hold below 5 percent for a 13th straight year.
Duo stands out on a national scale. Comprising 20 percent of the metro's multifamily inventory and home to below-average rents, South Los Angeles and Van Nuys-Northeast San Fernando Valley entered April with high 2 percent vacancy rates. Apart from New York City boroughs, these rates rank as the lowest among U.S. submarkets with at least 60,000 units, indicating strong demand exists for lower-cost rentals in Los Angeles suburbs and denser neighborhoods. Over the next two years, both areas will add few units, a dynamic that will provide the framework for tight conditions to be maintained.
EMPLOYMENT: Los Angeles County's job count reached a record mark last year. In 2023, a 0.7 percent rate of employment growth is expected, despite a drop in the number of traditional office-using positions.
CONSTRUCTION: More than half of the units finalized across the county are in Los Angeles proper, with the Koreatown, West Los Angeles, and Financial District neighborhoods each slated to add more than 600 rentals.
VACANCY: Demand for lower-cost units prevents a sizable vacancy increase, placing year-end availability at 4.8 percent. Among major metros with more than 500,000 units of stock, only New York City will end 2023 with a lower rate.
RENT: Above-average vacancy limits rent growth during 2023, placing the year-end rate at $2,800 per month. The Class C sector is poised to note a more pronounced growth rate, as segment vacancy is below its long-term mean.
• Deal flow in Los Angeles County fell by roughly 15 percent last year, with data from the first quarter of 2023 reflecting a lack of large-scale property trades. Investors paid an average of $327,000 per unit over the 12-month span ending in March. However, a more stable federal funds rate may translate to a near-term realignment in buyer-seller pricing expectations.
• The impending enactment of Measure ULA, which placed a 4.0 percent tax on all real estate transactions in the city of Los Angeles above $5 million and a 5.5 percent tax on deals above $10 million, likely motivated a collection of would-be buyers and sellers to take a wait-and-see approach during recent quarters. These investors may remain on the fence, as California voters can block the measure via a 2024 ballot item that would create a new requirement for two-thirds approval of state referendums that impose any new local special tax increases. If approved, the referendum would grandfather the rule, invalidate the newly authorized tax, and possibly usher in an uptick in investor competition for listings.
• Unaffected by recent tax adjustments, sub-$5 million Class C listings continue to trade in lower-cost submarkets, specifically Inglewood, Koreatown, Long Beach, and Southeast Los Angeles.