MARKET SNAPSHOT: High Unemployment Rate in L.A. Results in Falling Rents and Occupancy

By Erika Schnitzer, Associate EditorLos Angeles—Compared with other regions in the nation, Southern California’s apartment markets show some long-term growth potential, according to the 2009 Southern California Multifamily Market Report put out by the University of Southern California’s Lusk Center for Real Estate.Despite this, falling rents and occupancies in Los Angeles County reflect the high unemployment rate, in addition to the increased pressure from the shadow market of rented condos and single-family homes.“L.A. has shown that it changed pretty dramatically from where we have been in the last five years,” Delores Conway, Ph.D., director of the Casden Real Estate Economics Forecast at the USC Lusk Center for Real Estate, tells MHN. Los Angeles County saw net move-outs top 40,000, significantly impacting both rents and vacancies.Since 2004, the apartment markets throughout the county have been fairly tight, with less than 3 percent vacancies, Conway says. Vacancy in the fourth quarter of 2008 was up to 7.8 percent and is forecast to reach 8.5 percent by the end of 2009.Conway attributes this rise in vacancy to L.A. County’s high unemployment rate—which is currently 11.5 percent—and the large number of units that were delivered this year, as well as the shadow market, which is particularly prevalent in downtown Los Angeles where residents are renting condos.Though more than 7,500 units came online in 2008 and approximately 5,500 units are slated for delivery this year, Conway notes that it’s “nothing compared to what we had in the ‘80s, when they were building 10,000 to 20,000 units per year. There’s been a lot of growth in L.A. County and the economy is much more diversified than it was in the ’90s.” These forces, she believes, will help move the market forward.In part because of this rise in vacancy, rents fell, on average, 3.8 percent in 2008. Hollywood and the San Fernando Valley, in particular, saw significant drop offs in rents—8.1 percent and 6.1 percent, respectively. Conway notes, however, that much of this rent decline is from the concessions being offered to residents rather than actual rent reductions.In addition to residents moving out and doubling up, Conway notes that some former renters have chosen to take the opportunity to purchase homes for the first time. She notes that, in addition to the federal government’s $8,000 tax credit for first time home buyers, the state of California offers a $10,000 tax credit.While most of the news in Los Angeles is gloomy, Conway does point to one seemingly optimistic piece of news: “sale prices are coming down,” she says. Cap rates are “inching up in L.A. County but people expect them to go up much more because NOI is coming down.”Despite all this, Conway remains optimistic about multi-housing investment. “I think the multifamily market is still going to be the strongest commercial real estate market because we’ve had some serious shortage of housing in L.A. County and apartments are still the most affordable residential solution,” she says. (Click here to see last week’s Market Snapshot on St. Louis.)