Published: February 01, 2008
By Amanda Nagler,
Coldwell Banker Commercial WESTMAC
Driven by the city's attractions and overall beauty, Los Angeles
is renowned for its constant population growth and continuous
influx of new residents. In fact, over the last few years, the
market has added thousands of new residents and even greater
gains are anticipated between 2008 and 2010. The LA market also
experienced employment growth in 2007 (albeit slight), which has
helped to maintain these current population increases. What
continues to fuel the local Los Angeles apartment market is that
a good portion of these new residents seek out rental units
instead of purchasing the area's costly homes.
Currently, the Los Angeles apartment market is ranked sixth
nationwide, up three spaces from 2007, according to a recent
report from NAI Global, a network of independent commercial real
estate firms. The market's high housing prices (particularly
when compared to the rest of the country) and the overall
national housing market crisis (housing sales have dropped
substantially throughout the entire state of California, with an
overall 36 percent decrease in 2007) are causing the continued
high demand for rental units.
While the housing crisis is severely affecting the overall
national and state economy, it is actually benefiting investors
in apartment buildings in Southern California. Along with the
influx of new residents, existing residents priced out of the
Los Angeles market or who have experienced foreclosure are now
renters again. Apartment building owners are seeing the Net
Operating Incomes (NOI) of their properties increase as rental
rates increase with demand. This has caused investors to
continue to see LA as a safe investment choice for apartment
buildings and investors should remain "on the hunt"
for securing LA apartment properties in 2008 due to the expected
continued upside in the market.
Generally, Los Angeles has been a very tight rental market with
low vacancy rates. According to commercial real estate industry
market data company Reis, LA showed a low 3.5 percent vacancy
rate in their most recent report covering Q3 2007 and those
numbers are expected to decrease further in the coming year.
However, what remains especially tight are the Class B and C
properties due to overall affordability of these units vs.
luxury Class A rental units.
The overall value of an investment of a standard B/C apartment
building in Los Angeles remains excellent as the national market
is going through a period of change. According to Costar
findings, the average price per unit of older rent control
properties built prior to 1979 in Hollywood and Silverlake (an
area of huge growth and appreciation in the past five years), is
roughly $125,000 in 2007. While the volume of deals closed has
dropped, the price per unit has remained relatively flat.
Likewise, in Santa Monica, a prime area of historically high
demand and high prices, the volume of transactions has dropped
but values are even up slightly and averaging a high $243,000
per unit. Again, the fundamentals continue to support the
product and fuel the projected upside.
On the other end of the spectrum, there has been an increase in
Class A rental product, which is emerging from two sources: new
luxury apartment construction and condo units transitioning into
rental units due to the housing crisis. Most recently,
unfinished or not-yet-started condo developments and condo
conversion plays are the two types of investment products that
are suffering the most in LA as developers and converters are
unable to obtain financing for projects purchased before the
housing market crisis was identified. In fact, both of these
areas have almost halted completely opening doors for apartment
developers as banks remain comfortable financing new apartment
projects and sales transactions due to strong Southern
Californian rental fundamentals.
Construction of rental units remains up at 4 percent. In fact,
according to a recent Marcus and Millichap research report,
there are 4,700 new apartment units slated for construction in
2008. Generally, these new units are luxury products and are
being constructed anywhere from Santa Monica to downtown Los
Angeles. Historically less affluent areas are experiencing
gentrification and builders are projecting rental rates
comparable to affluent areas such as Santa Monica with these new
high-end products. It remains to be seen if these projected
rates of over $3.50 per square foot will be achieved in some of
these growing areas. Regardless, this will create even more
competition for B and C class properties.
High demand of rental units feeds the city's on-going struggle
with housing affordability in Los Angeles. One of the solutions
city officials are implementing is the requirement of minimum
affordable apartment and condominium units in new developments.
While requiring affordable housing in new developments helps
lower-income residents, the requirement has decreased overall
land values. Unfortunately, sellers have yet to adjust their
pricing expectations on their land which is starting to thwart
further development. Land is hard to come by in LA, as it is
mainly an infill development market, so high values prohibit
developers from doing their job, furthering the affordability
and housing availability problem.
Because of high demand for apartments stemming from the above
factors, rental rates are expected to continue to grow across
the board in 2008. Reis has tracked and reported a 2007 YTD
average of 1.3 percent growth in rental increases in LA but that
number is projected to be over 6 percent in one year's time.
Anecdotally, Coldwell Banker Commercial WESTMAC has seen average
asking rents at just over $1,500 per month, up from previous
years and confirms the LA trend of increased rental rates from
year to year.
On the flipside, to the affordability crisis, the two areas of
Hollywood and downtown LA, neighborhoods that have historically
battled high crime rates and other negative factors have
experienced huge appreciation and popularity in this housing
surge. Downtown Los Angeles, for example, is the home of one of
the largest developments in the city's history called The Grand
Avenue Project. This project, coupled with the LA Live Project
by the Staples Center, will eventually support the several
thousand new rental and condo units built downtown in the past
five years. The Grand Avenue project is a $3-billion plan to
remake the Grand Avenue area into an LA city center that will
include a large park. LA Live is currently under construction
with the first phase complete. Adjacent to the Staples Center
arena, LA Live will feature a six-block entertainment
destination with theaters, restaurants, broadcast studios,
luxury high-rise hotels and residential units.
The Hollywood market growth is being led by four major
developments that are breaking ground in 2008 or are underway.
At the famous Hollywood and Vine intersection, there is a
five-star W Hotel and Residences being built by Gatehouse
Capital Corp. Adding to that growth is Legacy Partner's
high-rise luxury apartment project next door.Clarett Group is
planning Blvd6200, a $400-million, mixed-use project down the
street involving 1,000 new apartments, retail and dining venues.
Additionally, a 20-plus-story mixed-use project is in advanced
planning for Sunset Boulevard, across from the famous Sunset
With ideal weather, nearby beaches and mountains and a hot
restaurant scene, Los Angeles is a place of immense overall
upside. Major developments in once-forgotten areas are
testaments to its popularity. While 2008 will likely be a year
of transition due to rate cuts and uncertainty that comes with a
presidential election, LA's apartment market will stay strong.
Amanda Nagler is a
commercial real estate broker specializing in
multifamily at Coldwell Banker
Commercial WESTMAC in L.A.
1515 S. Sepulveda Blvd.
L.A, CA 90025 (310) 478-7700 firstname.lastname@example.org
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