Why LA Multifamily Is Still a Top Pick for Investors
The Los Angeles apartment market sees rising values and rents as demand far exceeds supply.
We have been cautiously optimistic when it comes to the future of the Los Angeles apartment investment market.
Deterrents such as rent control, rising interest rates, inflation and other threats have certainly left some investors seeking assets in more landlord-friendly states. The demand for apartment acquisition opportunities throughout the greater Los Angeles area, however, continues to prevail. What we are seeing from both the buyer and renter sides is a tight market, driving up pricing and competition for properties. This is all despite the headlines and reports that we are experiencing a declining population and exodus from California.
L.A. apartment vacancy is currently hovering around a minuscule 3.4 percent. This vacancy is lower than the pre-pandemic rate of about 4.4 percent in the first couple months of 2020. Asking rents have grown 7.7 percent over the past 12 months, and average monthly asking rents across Los Angeles County stand at $2,130, albeit still lower than the median monthly home payment of $2,659. With L.A. County’s unemployment rate currently near 7 percent, the trend is continuing downward as this entertainment capital of the world has been a boon to the L.A. economy, strengthening all the more since the pandemic has dramatically increased the demand for streaming content. As lockdowns and mask mandates ease, young professionals seeking the quintessential L.A. lifestyle are clamoring for rental housing walkable to trendy shops, restaurants and bars.
Because many renters are priced out of home ownership, more half of residents of the greater L.A. area are renters. We don’t see that improving any time soon as soaring construction costs, lack of infill sites, NIMBY sentiment and onerous permitting continue to plague the ability to deliver desperately needed housing units. Although 9,600 new units were delivered in the past 12 months and 28,000 more are under construction, demand continues to surpass deliveries.
My advice to would-be apartment buyers seeking to start or expand their portfolios here is to be able to make sound, quick decisions and to be well-funded as there will inevitably be a number of offers. They also need to be prepared to pay low cap rates—many under 3 percent for prime assets.
From a seller standpoint, because of the low inventory, it is a challenge to quickly identify a new local asset—a primary reason they are choosing to hold onto their assets. The few that do choose to sell are ready and willing to exchange out-of-state for higher cap rates, less regulations and restrictions, and, finally, more buying choices and opportunities.
While the L.A. market continues to remain strong, many believe the economy is poised to make a correction as inflation is no longer considered to be transitory. But, for the time being, the tight housing market has been a win for apartment investment.
Kimberly Stepp is principal, Stepp Commercial.