The 764,786-unit market-rate investment-grade Los Angeles rental apartment market remains one of the nation’s premier multifamily markets, with low vacancy and high rents. Demand is strong, rents continue to grow (although not as much as the first quarter) and the city retains its edge as a high-end residence location for a broad spectrum of the rental market.
Reis reports a second quarter 2012 vacancy rate of 3.6%, down 10 basis points from the prior quarter, and 80 from a year earlier. The current Class A rate is 4.8%, up 10 basis points over the quarter but down 70 basis points year-over-year. The Class B/C market has a 3.0% vacancy rate, down 30 basis points for the quarter, and down 90 over twelve months. Measured at year-end, the overall vacancy rate for this market had varied between 2.0% and 5.3% in recent years, well below the U.S. and West Region averages.
In their third quarter 2012 report, Marcus & Millichap states “the countywide vacancy rate will decline 50 basis points year-over-year to 3.4%.” This source noted that “an economic recovery and shaky housing market have broadened demand for rental units in Los Angeles County. Over the last year, countywide vacancy improved 80 basis points to 3.6%.” According to Jones Lang LaSalle’s 2012 Multifamily Property Forecast, “vacancy, which is below the national average, is likely to drop further” and that the market “is registering 96% to 97% occupancy.” Reis reports a national average of 4.7% and a West region average of 4.0%, so Los Angeles is outperforming its national and regional peers. Vacancy is forecast to fall even further, according to Reis, reaching 3.1% by year-end 2012 and increasing only slightly in the years to follow, indicating a market with effectively full occupancy for the foreseeable future.
SUPPLY AND DEMAND
Demand slowed in the second quarter of 2012, Reis reports, but a substantial 1,236 units of net absorption were still recorded. The total for first quarter was 2,244, bringing the mid-year total to 3,480 units, not quite halfway to the 2011 mark of 8,910 units, which was the highest in over 10 years. After averaging just over 1,540 units from 2000 to 2010, 2011 was a standout performance, especially after the negative net absorption reported in both in 2008 and 2009 because of the recession. Indeed, the years 2010 (6,736 units of net absorption) and 2011 could be seen as marking the end of this market’s inconsistent demand profile.
As of this report date, new construction data from Reis indicate just over 800 units in eight projects have completed, leaving more 7,201 units under construction. Of these about 1,000 currently have 2012 completion dates. New construction has been uneven lately, with the 1,680 units built in 2011 overshadowed by 4,000 in 2010. Prior years saw both higher and lower totals; the current inventory is within 2,500 units of the amount recorded at the end of 2010. According to Marcus & Millichap, “in the past 12 months, 1,262 units were completed, a 0.2% addition to total inventory. In the previous year-long stretch, builders added about 2,800 rentals.” This source reports that “over 2,600 units are currently under way in the county, and more than 19,500 are in the planning pipeline.” According to Jones Lang LaSalle, “while development is resuming, demand exceeds current supply and this is expected to continue in 2012.”
Looking forward, Reis sees a similar scenario, estimating about 1,800 new units all told in 2012, largely overmatched by 7,867 units of net absorption. This is a huge difference for any market. Construction and demand is forecast to be more closely aligned through the remaining years of the Reis forecast. For the entire 2012 to 2016 period the predicted totals are 21,010 units of new supply and 25,585 units of net absorption.
Rents continued to rise in the second quarter, reflecting the continued tightness of the Los Angeles apartment market. The average asking rent increased 0.7% to $1,435 per month, while the average effective rent rose 0.9% to $1,396 per month. The year-over-year increases are 2.4% and 3.0%, respectively. Rents lost much ground in 2009 and were flat in 2010 as the Great Recession took its toll. The second quarter average asking rent for Class A units was $1,806 per month, up 0.5% for the quarter, and 2.5% year-over-year. The $1,234 per month asking average for Class B/C units is up 0.8% over three months and 2.2% year-over-year.
“With vacancy at a historically low level, operators are charting more significant rent growth. In the most recent 12 months, asking rents rose 2.2% to $1,405 per month. Effective rents grew at a more accelerated pace of 2.7% in the same time frame, to average $1,358 per month,” according to Marcus & Millichap. “Class A asking rents were raised more aggressively in the past year, posting a 3.3% jump to $1,785 per month. In the Class B/C sector, asking rents edged up 2.0% to $1,220 per month. During the corresponding period last year, Class A and Class B/C rents grew at rates of 0.4% and 0.6%, respectively,” according to this source.
Rents are well positioned in the midpoint of 2012. Although the large annual increases that appeared in the course of the 2000s are not forecast to return, market observers are virtually unanimous in stating that rents are high and set to go higher. Reis forecasts annual increases of 3.7% and 4.6% for asking and effective rents in 2012, with similar gains to follow. “In 2012, asking rents will rise 3.2% to $1,429 per month, while effective rents advance 4.4% to $1,392 per month,” Marcus & Millichap predicts.