Why LA Apartment Fundamentals Stand the Test of Time

Despite capital markets disruptions, Los Angeles remains the "gold standard" in the multifamily sector, according to Kimberly Stepp of Stepp Commercial.

Kimberly Stepp

The Los Angeles multifamily sector has been and remains one of the nation’s top metropolitan rental markets. Renter demand continues to outweigh supply despite the state’s requirements to aggressively add new housing units. In 2021, the Los Angeles City Council approved the Housing Element Update 2021-29 as a guide for developing just over 450,000 new market-rate and affordable housing units. With rising labor and materials costs as well as the higher interest rate environment, it will be a challenge to meet that new housing goal by 2029. Demand is a long-term consequence of a coastal California lifestyle; an assorted set of thriving industries such as entertainment and digital media, aerospace, and bioscience; and a unique and diverse cultural flavor that seeps into all aspects of everyday life. With the waves of tech layoffs concentrated in Northern California, we may see some migration from former tech sector employees joining the Los Angeles-concentrated entertainment and digital media industry which shares some crossover when it comes to recruitment requirements.

While the implementation of new legislation continues to make things harder on landlords, the key fundamentals that make living in the greater Los Angeles region attractive to young professionals and other demographics, remain steadfast. As evidenced in a report released last week from the State of California Employment Development Department, job growth remains positive. It states, “The seasonally adjusted unemployment rate in Los Angeles County increased over the month to 4.9 percent in February 2023, from a revised 4.8 percent in January 2023, and was below the rate of 5.7 percent one year ago. Civilian employment increased by 1,000 to 4,725,000 in February 2023, while unemployment increased by 9,000 to 245,000. The civilian labor force increased by 11,000 over the month to 4,971,000 in February 2023.”

With a demand that outweighs supply, a growing job base and a Southern California lifestyle that can’t be replicated anywhere else, Los Angeles continues to be a gold standard for the multifamily sector. This bodes well pertaining to the long-term success for apartment investment in the region, especially in prime areas such as Santa Monica, Beverly Hills, and West Hollywood, among others.

While the first three quarters are expected to have tight inventory, we anticipate a pick-up of listing activity to occur the latter part of this year and into 2024. Many long-time owners will be looking to leave the state to seek opportunities with better cash flow. Capital that has been sitting on the sidelines has been getting impatient. Investors with capital to deploy either by trading out of a 1031 exchange or those that can pay all-cash have a significant advantage to win their bid as financing is more of a challenge. Sellers are seeking a certainty of closing and cash is king, even more so in a high interest rate cycle and with the recent banking sector turmoil likely to slow down lending activity even more. The reality is sellers oftentimes need to lower their pricing expectations, especially on assets that have deferred maintenance or those in B and C locations.

With recent years of soaring rental increases, over the past 12 months, lease rates have slowed down, with about a 1 percent increase throughout the Los Angeles region. However, rents in the more desirable submarkets have been slightly higher. For example, in the Westside’s greater Culver City submarket which encompasses Culver City, Playa Vista and the L.A. neighborhoods of Mar Vista, Palms, and Beverlywood, rents rose 3.6 percent in 2022 according to CoStar.

Where there is change, there is opportunity and we are looking forward to the coming wave of multifamily investment activity in Los Angeles.

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