Apartment market fundamentals remain strong in Los Angeles despite a changing market

— By Priscilla Nee, Executive Vice President, CBRE —

The Los Angeles apartment market began to show signs of cooling off as supply increased to meet demand. Rents were down marginally year-over-year as demand for apartments last year eased after demand pent up from the pandemic. In response to declining prices, tenant demand for space has seen an increase in the first months of 2023.

Marketwide, vacancy stands at just under 4.5 percent as of the first quarter of 2023, which is above record lows of around 3.7 percent a year earlier. Concessions for new tenants are present. They have been consistent and have increased since the third quarter of 2022 as landlords work to attract large tenants to new and existing projects.

The additional new supply is outpacing current demand, despite early demand rallies for the year. That, coupled with a strong development pipeline and an additional 27,000 units under construction, may continue to drive vacancy rates higher if demand doesn’t pick up. This could lead to possible reductions in rental rates if a property remains vacant on the market long enough.

Most of the current development and construction is centered in Downtown Los Angeles, Koreatown, and South Los Angeles. Markets like Inglewood are establishing themselves as future growth areas in the city for housing and associated supporting infrastructure, including new business and employment zones. Ongoing concerns about crime and homelessness reduce demand in certain submarkets, however new initiatives throughout the city of Los Angeles are leading some to see a path toward better living conditions for Angelenos to enjoy. the city once more.

Investment volumes have decreased significantly. Sales and new loan origination have also declined notably for multi-family products in all markets. This is primarily due to the tighter interest rate environment and concerns surrounding the small to midsize banking sector that provides a large amount of loan origination for the commercial real estate sector. Many investors worry that loan payments will start to exceed the current market value of apartment rentals if interest rates continue to rise. This has led to a window of alternative sources of capital. However, given the size of the Los Angeles multi-family market, it may take some time before property financing catches up with investor demand for quality assets or development opportunities.

Concerns regarding the new City of Los Angeles transfer tax, the ULA measure, and additional concerns about the wait time for planning approvals may lead to compounding factors resulting in short-term declines in investment and new development. in the multifamily market.

Currently, property values ​​are holding as the market breaks even. Investors, developers, and renters alike should take into account the current debt and regulatory environments across the market when reviewing their options.