MARKET SNAPSHOT: With Demand Steady, L.A. Property Managers Turn to Rent Hikes to Boost Revenue

By Philip Shea, Associate Editor

Source: Marcus & Millichap

With payrolls expanding and vacancies trending downward, many property owners in the City of Angels are seeking to raise rents as apartments turn over in order to generate additional revenue. While the declines in vacancy have been minimal due to a gradual increase in supply, Marcus & Millichap notes that there are only six submarkets in the Los Angeles MSA with rates above five percent.

However, with a new construction cycle on the horizon, owners and operators will have to be cautious with rent hikes in order to remain competitive. By the end of the year, developers are expected to have completed 2,200 units—with 1,600 units in the fourth quarter alone, and construction activity is set to more than double in 2013.

Year to date, asking rents have increased 3.6 percent to $1,435 per month, while effective rents have jumped 4.7 percent to $1,396 per month—indicating a significant reduction in concessions.

Driving such numbers if the fact that local employers added 59,500 jobs across L.A. county alone, expanding payrolls by 1.6 percent. Additionally, five out of 11 sectors posted job gains of over 3 percent during the last six months. Among the best performers were the hospitality and business services sectors, expanding their payrolls by a combined 31,490 positions.

In tandem with the gains in jobs, single-family housing is becoming more and more attractive for many of the city’s residents, as the gap between Class A rents and monthly mortgage obligations climbed to $313—in favor of owning. As such, it is expected that rent growth for high-end units will likely wane in the coming years.

Source: Marcus & Millichap

The overall vacancy rate dropped 10 basis points in the third quarter of 2012 to 3.5 percent, and many expect the county will see another 10-basis-point before the end of the year. According to Marcus & Millichap, the Class B/C sector remained the tightest with a rate of 3 percent, this after falling 80 basis points year-to-date. Meanwhile, the Class A sector saw a slighter decrease of 60 basis points to 4.5 percent as operators “favored rent growth before facing stronger competition in 2013.”

The San Fernando Valley saw the lowest vacancies and lowest rents in the third quarter, with an overall rate of 3 percent and average rents around $1300 per month. The Greater Downtown area saw the highest relative vacancy rate—near 3.5 percent, while the Westside Cities submarket saw astronomical average rents above $2,000 per month.

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