GlobeSt.com: What is driving this major increase in apartment rents?

Kawaoka: Multifamily rents are being driven by the demand outpacing the lack of supply of affordable housing. A big contributor is the fact that household formation has been growing and there is a limited supply of available starter homes.

GlobeSt.com: As new supply comes online in L.A., do rents stagnate?

Kawaoka: For the luxury sector of apartments, rents will stagnate as that's the majority of what's currently being built. The lion's share of all new projects are targeting the same upper end demographic. Evidenced by concessions, we are seeing a temporary oversupply being built for this pool of renters

GlobeSt.com: How are investors responding to the rental increases, and what has this done to property values?

Kawaoka: Investors are looking to capture inefficiencies by purchasing value-add apartment complexes where there's a healthy delta between the property's actual rent and market rents. Furthermore, in Los Angeles where we have rent control, investors prefer non rent-controlled buildings where they can implement their renovation plans expediently. Increasing rents have in turn increased the property values. Investor demand is high as ever for the right value –add opportunities.

GlobeSt.com: Do you expect cap rates to continue to compress looking out 12 months?

Kawaoka: Predicated on the fact that it's believed interest rates will rise in the next 12 months due to the FED's balance sheet normalization program; I anticipate cap rates to follow.

GlobeSt.com: What is competition like from investors?

Kawaoka: Private investment dominates the buying pool for apartments throughout Los Angeles. According to our research the private investor represents 85% of the transaction volume this year. REIT's Institutional and Private Equity make up about 13% and owner user's 2%. As this market has surged, competition remains high and subsequently off-market deals are highly sought after.

GlobeSt.com: What L.A. submarkets are the most sought after for multifamily investment?

Kawaoka: Long Beach, Koreatown and Inglewood have been areas that have witnessed strong investment and transaction volume. These are areas that investors are drawn to due to their attractive growth potential.

The substantial increase in apartment rents is driving more multifamily investment activity, according to a new report from NAI Capital. The report shows that rents have increase 5.1% over last year to an average unit price of $1,678 per square foot. That is a record-breaking high for the market. Although these rental increases have caught the attention of institutional investors, NAI Capital VP of multifamily Kevin Kawaoka says that private capital is still dominating the investment market. He also says that there is a ceiling to the rent growth, and we may be seeing a plateau soon. To find out more about the multifamily market and the record-breaking rents, we sat down with Kawaoka for an exclusive interview.

GlobeSt.com: Apartment rents have been rising steadily. Is there a ceiling?

Kevin Kawaoka: Given the fact that Los Angeles hourly wage growth has been bumping along at roughly 2.7% and we're starting to see rental softening in certain highly developed areas of Los Angeles (e.g. Hollywood and Downtown L.A) there seems to be a ceiling on rents. In addition, we're starting to see rents level out with post renovated buildings located in class A areas where rents have risen aggressively in the last couple of years.

GlobeSt.com: What is driving this major increase in apartment rents?

Kawaoka: Multifamily rents are being driven by the demand outpacing the lack of supply of affordable housing. A big contributor is the fact that household formation has been growing and there is a limited supply of available starter homes.

GlobeSt.com: As new supply comes online in L.A., do rents stagnate?

Kawaoka: For the luxury sector of apartments, rents will stagnate as that's the majority of what's currently being built. The lion's share of all new projects are targeting the same upper end demographic. Evidenced by concessions, we are seeing a temporary oversupply being built for this pool of renters

GlobeSt.com: How are investors responding to the rental increases, and what has this done to property values?

Kawaoka: Investors are looking to capture inefficiencies by purchasing value-add apartment complexes where there's a healthy delta between the property's actual rent and market rents. Furthermore, in Los Angeles where we have rent control, investors prefer non rent-controlled buildings where they can implement their renovation plans expediently. Increasing rents have in turn increased the property values. Investor demand is high as ever for the right value –add opportunities.

GlobeSt.com: Do you expect cap rates to continue to compress looking out 12 months?

Kawaoka: Predicated on the fact that it's believed interest rates will rise in the next 12 months due to the FED's balance sheet normalization program; I anticipate cap rates to follow.

GlobeSt.com: What is competition like from investors?

Kawaoka: Private investment dominates the buying pool for apartments throughout Los Angeles. According to our research the private investor represents 85% of the transaction volume this year. REIT's Institutional and Private Equity make up about 13% and owner user's 2%. As this market has surged, competition remains high and subsequently off-market deals are highly sought after.

GlobeSt.com: What L.A. submarkets are the most sought after for multifamily investment?

Kawaoka: Long Beach, Koreatown and Inglewood have been areas that have witnessed strong investment and transaction volume. These are areas that investors are drawn to due to their attractive growth potential.