In the world of commercial real estate, multifamily owners and investors are still enamored with Los Angeles, but the health of that relationship is directly linked with this market's sometimes-waning ability to provide expected returns.
The Fundamentals
Based on most market fundamentals, Los Angeles is still a safe haven for a great variety of investor capital. In 2005 alone, the market grew by 9 percent, or more than 86,000 residents. In 2006, it is expected to grow by almost 70,000 more residents. Between 2008 and 2010, even greater gains are predicted.
From this growth comes what seems to be never-ending demand, piled on a market where housing inventory already has fallen far short of residents' needs. On the construction front, Los Angeles has seen its condo conversion activity fall precipitously, down by 30 percent since this time last year. Still, the market represents 10 percent of the nation's multifamily construction activity, and while the single-family home market is down 1.7 percent from last year with six months of inventory on deck, new multifamily construction in Los Angeles as of June is up 43 percent, with 5,645 permits pulled for development, primarily in the downtown market.
Yet new construction cannot keep up with demand, and that translates into some of the lowest and most steadily attractive multifamily vacancy rates in the nation. According to a recent report by commercial real estate research company Reis, the Los Angeles vacancy rate since late 2001 has fluctuated between just 3.1 and 3.5 percent. At the beginning of 2006, Reis reported overall vacancy at 3.3 percent. By June, that figure was down to approximately 3 percent.
Rents also are on the rise, leading to one of the greatest issues facing this market: the inability of residents to afford to live here. From West Covina down to the waterfront, a renter would be hard-pressed to find a one-bedroom apartment for less than $900 per month. Based on the assumption that housing costs equate to an average 30 percent of household income, Los Angeles County residents must make at least $36,000 per year to afford a mere one-bedroom apartment.
According to Reis, the Class A average asking rents in Los Angeles have increased 5.7 percent from mid-2005 to mid-2006 to $1,715 per month and Class B and C average rents from the same time period are up 4.9 percent to $1,111 per month. For 2006, a 5.2 percent gain in the average asking rent, for a total $1,350 per month, is expected, though this number will be higher in the most active submarkets. Among those submarkets is downtown Los Angeles, where the growth in asking rents between mid-2005 and mid-2006 is 8.3 percent. Together, these factors have investors of all types trying to link themselves with Los Angeles multifamily properties.
