Los Angeles Multifamily Rents Sustain Record Levels

Apartment rent growth in Los Angeles has slowed, but the market has sustained record-high rents with nominal increases. According to a recent report from NAI Capital, Los Angeles apartment rents increase .6% in the first quarter to an average of $1,861 per unit over the previous quarter and nearly 3% over last year. While rent growth is slowing its rapid pace—as many have expected—the market has maintained record-high rents and developers have continued to meet high pro formas.

“The really strong economy and the lack of availability of affordable housing is really driving the rental rates,” Tim Steuernol, EVP at NAI Capital, tells GlobeSt.com. “There are a significant number of high-earning tenants in Los Angeles that can’t afford a single-family homes because there is still a gap between mortgage rates and rental rates for apartments. Those tenants have the ability to pay high rental rates on apartments because of their income. That is a big factor.”

While rents have continued to climb, the vacancy rate has bounced up and down. In the first quarter, vacancy in Los Angeles increased 10 basis points. In the fourth quarter of 2018, it had jumped 20 basis points. The rising vacancy is largely due to new apartment stock, and is actually nominal considering the amount of new development. Because the vacancy has only increased slightly, Steuernol doesn’t think that there is an over-supply or over-development problem, at lease for now. “In the near term, that is less of a concern,” he says. “It is probably a bigger concern in the future. Because of the lack of affordability in the single-family home market, renters’ ability to pay high-rents and the demand for class-A, high-end product, I don’t think that it is going to be an issue. However, it is definitely something to think about in the long-term.”

In fact, rent growth is strongest in markets with little to no new development activity. “The Westside is a perfect example,” says Steuernol. “That market has the lowest amount of new units coming to market and some of the highest rents in the city. The market also has high-paying tech jobs. That all translates to higher demand and higher rents.”

Downtown Los Angeles and Glendale have the highest new development in the city, and they are markets that could be reaching a glut of apartment construction. “In Downtown Los Angeles and in Glendale, there are more units being built, and they are currently being absorbed,” says Steuernol. “In the future, however, that might become an issue for developers.”

Still, Steuernol expects rents to remain strong and even grow through the end of the year. “I think that we will continue on the same patter that we are riding,” he says. “I think that rents will continue to sustain themselves if not rise.”