Despite Rent and Occupancy Declines, Transaction Volume in Los Angeles Reaches Its Peak

Los Angeles--While valuations vary between submarkets, the local economy has caused declines in rental rates and increases in vacancy throughout the Los Angeles MSA.

Los Angeles—While valuations vary between submarkets, the local economy has caused declines in rental rates and increases in vacancy throughout the Los Angeles MSA.

“Predominately the economy has created vacancy because people in the younger group either never left home or moved back home, and those in the lower-income levels have double-upped or downsized,” Robert Leveen, senior vice president of Lee & Associates-Investment Services Group (Lee ISG), tells MHN.

While vacancy reportedly averaged 5.5 percent for the first quarter, Leveen believes, from his experience talking to clients and driving around the area, that this rate is, in actuality, higher.

“For a long time we were underwriting a property for sale with a 3 percent vacancy [rate], and in some places it was even less—in supply-constrained markets with high demand, it was 2 percent,” Leveen recalls. “Now, we underwrite with 5 percent vacancy because that’s what the lenders want to see, but on a case-by-case basis you’re closer to 7 to 9 percent vacancy, which is an approximation based on the wide and varied market.”

Rents have declined about 20 to 25 percent decline, with the most significant declines in higher-income areas. Particularly on the West Side, there is significant vacancy and concessions, as well as more leniencies on late rent payments, Leveen reports. Meanwhile, Class C assets are seeing closer to 10 percent declines.

At the same time, the shadow market seems to have had a great impact on lower-income areas, notes Leveen. “People dropped out of apartment acquisition and started buying single-family homes because they could undercut the rents, and a lower-income tenant can rent a house at the same price.”

Surprisingly, Leveen notes that he saw his best transaction volume in 2009. Smaller Class A properties are trading at or below a 5 cap, with Class C properties closer to a 7 percent cap rate. However, although pricing has declined, Leveen does not believe it will reach the level it was at in the ‘90s. “The fundamentals that would drive the pricing down don’t exist,” he explains. “There’s enough demand on the buying side that makes sure we won’t see it get to that place.”

Whether or not Los Angeles has actually hit its bottom still remains to be seen, but Leveen remains optimistic. “This is Southern California real estate, and people want to live here. You’ll always have people coming here, and that will always drive rental demand, and you have a supply-constrained market—that will always exist here.”