Is L.A. Apartment Supply Catching Up to Demand?

The Los Angeles apartment market has a severe supply-demand imbalance, which has been a primary driver of record-low multifamily vacancy rates and rising rents. That trend, however, might be shifting. In the last three years, developers have delivered more than 37,000 apartment units in the market, and the new supply could be catching up with demand in the submarkets with the most development activity. The vacancy rate in Downtown Los Angeles, for example, increased to 9.2% in the third quarter, according to research from NAI Capital.

“If you look at the Downtown Los Angeles market, where we are seeing a lot of new construction, we are also seeing higher vacancy,” Tim Steuernol, EVP in NAI Capital’s multifamily services group, tells GlobeSt.com. “We are seeing an impact on rental demand, and that could eventually trickle into other parts of the Los Angeles market where new construction is taking place.”

Downtown Los Angeles is an interesting case study for supply-demand dynamics in Los Angeles. The market has overwhelmingly accounted for new apartment construction in the greater L.A. market, and the vacancy rate has certainly increased; however, if you ask Downtown experts, the apartment vacancy has only increased because of the large number of new units delivered—not because of a lack of demand or absorption. “I think that makes sense,” says Steuernol. “It is not totally clear, and only time will tell. I do think that overtime, the new construction in Downtown Los Angeles will be absorbed. There is still a huge need and demand for multifamily housing, and it feels like those units will be leased up. The question is at what rate will they be leased up.”

While select submarkets have seen rising vacancy rates and stagnant rents, overall, the apartment vacancy in Los Angeles is at a record lows. According to research from NAI Capital, the total market vacancy is 3.8%, down year-over-year. “We are still seeing historically low vacancy rates and we are still seeing rent growth,” says Steuernol. “The market will remain strong, and I think that we will still see a lot of demand. All of the fundamentals are there, and I think that 2020 will be a great year for the multifamily market.”

Apartment construction is declining in Los Angeles. There are currently 25,000 units in the pipeline, down 10.4% since the third quarter last year. While supply is catching up to demand, it still has a long way to go before it gets there. Steuernol believes there is still an apartment shortage and a need for new units. “There is still a ton of units in the pre-development phase, and there continues to be a need for housing. There is particularly a huge lack of affordable apartments,” he says. “My take is that we still need to see apartment construction and that those units will be leased. It doesn’t seem like there is an over supply issue or that supply is outpacing demand.”