As a whole, the Los Angeles County apartment market is poised to make a comeback this year.

Core submarkets such as Hollywood/Silver Lake, West L.A./Westwood/ Brentwood, and Marina Del Rey/ Venice/Westchester will register strong operational improvements as below-peak rents encourage residents to relocate. Newly re-employed workers returning to the apartment market will migrate to premier communities in the Westside Cities, South Bay, and close-in parts of the northern valley, primarily along Ventura Boulevard. And in the Greater Downtown area, white-collar job growth early this year will support a drop in vacancy to historical levels by late summer and a reduction in leasing incentives by the fourth quarter.

But the star of the county's recovery may just be the San Fernando Valley.

Due north of city center, and encompassing more than a dozen municipalities, the San Fernando Valley is witnessing a recovery that took hold much earlier—in mid-2010— than in its surrounding submarkets, a welcome sign after four years of weakening.

The Valley's vacancy rate peaked at 5.5 percent during the second quarter of last year and improved by the end of the year to 4.9 percent. This stabilization should continue throughout 2011 as the slowly strengthening economy supports job creation and household formation, while builders postpone projects, driving completions to a 16-year low and keeping supply in check.

While the recovery will vary across the county, San Fernando Valley rental communities closer to core employment hubs will enjoy the bulk of leasing activity for another year—a trend that bodes well for both investment and development opportunities in the region looking ahead.

Filling the Void

The Valley's net absorption was strong in 2010, totaling 1,200 units, driven by a surge in Class A demand. During the downturn, effective rents for top-tier properties in highpriced neighborhoods such as Woodland Hills/Tarzana/Encino and Sherman Oaks/Studio City/North Hollywood fell 12 percent and 7 percent, respectively, encouraging renters to upgrade. In fact, those two areas accounted for half the net gain in absorption last year.

As the market improves, however, operators of these close-in Class A communities will be the first to withdraw concessions and raise rents.

No apartment units are slated for delivery in the Valley this year, an anomaly for a region that averaged 1,100 units annually over the past five years. So even a modest uptick in renter demand will help stabilize outlying corridors. Vacancy is forecast to fall another 40 basis points (bps) this year, to 4.5 percent, which is still 70 bps above the long-term average.

As a result, rents are expected to continue climbing. In 2010, asking and effective rents posted modest gains of 0.3 percent and 0.5 percent, respectively. And that momentum will gather speed this year—asking rents will advance 1.5 percent, to $1,314 per month, while effective rents will rise 2.7 percent, to $1,276 per month, by the end of 2011.

As the area's labor market improves and hard-hit blue-collar sectors resume expansion, renter demand will spill into the Valley's lower-tier segment in late 2011 or early 2012. Los Angeles County employers eliminated nearly 370,000 jobs through the recession, including 4,300 positions in 2010. But by year-end 2011, metro employers are expected to expand payrolls by 56,000 spots, or 1.5 percent.

Despite this, the pace of recovery is not uniform: Locations farthest from job centers, including the northern portion of the San Fernando Valley, are expected to struggle with above-trend vacancies through 2011.

Transactional Traction

On the investment side, the buyer/ seller expectation gap continues to narrow, partly fueled by the continued availability of low interest rates for qualified borrowers. Transaction velocity in the Valley turned positive for the first time in several years during 2010, rising almost 10 percent, and the median price advanced 4 percent, to $126,700 per unit.

Investor sentiment should improve further this year as well. Price stability and leasing trends suggest continued operational strengthening, encouraging long-term hold buyers to act early in 2011 before a more robust recovery sends interest rates upward.

Risk-averse buyers will likely target premier corridors along Ventura Boulevard and other close-in locations in the Valley, where minimal development will fuel outsized rent growth in the coming years. Cap rates for stabilized assets along these high-traffic corridors will average in the high–5 percent to low–6 percent range. Initial yields for properties with some distress or those located farther into the outskirts will average more than 7 percent early this year but should recede as more investors surface.

Last year, much of the region's transaction activity was driven by REITs and institutions armed with equity. High net-worth private buyers and some REITs will continue to acquire well-located Class A apartment complexes in prime locations throughout the Valley. But as the debt markets continue to loosen, more private investors, as well as institutions, will seek out additional Class A and B opportunities.

Regional Implications

In the greater region, deal flow is likewise expected to increase, with supplyconstrained locations driving acquisitional activity. This flight to safety pushed down cap rates for Class A and well-located Class B product to the high–5 percent to low–6 percent range last year, with further compression likely in 2011 as operations strengthen. Favorable interest rates will encourage private buyers to consider properties with greater risk, and many of these investors will circle the entire L.A. metro looking for value-add deals.

Again, distressed assets and those located in perimeter areas will see cap rates above 7 percent in the early part of 2011. As increased investment activity and renter demand spills into more peripheral locations, however, cap rates for these properties will start to fall.

Overall, the San Fernando Valley apartment market has proven resilient, and its recovery has outpaced Los Angeles and the nation as a whole. The lack of new units this year, combined with a return to job growth, should continue to push occupancies and rents higher this year and beyond.

Adam P. Christofferson is the first vice president and regional manager of Marcus & Millichap's Encino, Calif., office.
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Denver's rent growth this year and next should surpass expectations.





* Projected
Sources: Marcus & Millichap Research Services; Reis