Michel D. Hibbert, Charles Dunn Company
The multifamily market in Los Angeles continues to be a hot property sector as the economy improves and jobs are added throughout the region. I believe we’ll hear much of the same buzz about the market in 2015 that we’ve heard for the past few years. This includes statements like vacancy rates are very low and demand outweighs supply. This results in rising rents, strong demand for multifamily investment property, climbing prices climbing and cap rates that continue to compress.
Los Angeles County ended the third quarter of 2014 with a vacancy rate of just 3.2 percent. Asking rents continued to increase, with third-quarter rents coming in at an average rate of $1,521 per month. This is up 0.9 percent from the second quarter of this year, according to Reis. On the investment side, properties are trading at sub-4 percent cap rates. There were 80 apartment sales totaling $693 million in the third quarter, with an average per-unit price of $300,000.
Some of LA’s hottest multifamily submarkets include the Westside, Beverly Hills, West Hollywood, Hollywood, Echo Park, Silverlake and Downtown LA. The most in-demand and promising submarket for multifamily is likely Playa Vista, however. Google recently announced it purchased 12 acres of developable land in this submarket, which could potentially contain about 1 million square feet of space, the LA Times reported. This development could one day be home to as many as 6,000 highly paid employees. Google’s presence in the area could also act as a catalyst to attracting other tech firms, thereby exponentially increasing the demand for nearby housing.
When it comes to investor demand, the supply of properties is limited. When they do come on the market, they are hotly contested. This is mostly due to the fact that many multifamily owners in key submarkets don’t want to sell. They see overall property values and rents on the rise. Others are concerned that if they sell, they wouldn’t necessarily know where they would reinvest their money if they wanted to stay in the Los Angeles market. We may see a loosening in the amount of properties coming to market in the coming years, particularly those that are owned by individuals or private investors.
The Mayor of Los Angeles recently proposed the retrofitting of concrete buildings and wooden structures built before 1980. This proposal applies to structures that were constructed above carports or garages and are supported by thin columns. He hopes to undertake this retrofitting initiative over the next five years. As many multifamily properties in LA fit this description, owners may choose to sell the property to avoid the costly retrofit.
New multifamily development is certainly needed to help meet the demand for the Los Angeles market. Development is again a viable option for investors due to the strong property values and rental rates. Multifamily land for development is being actively sought out by developers. Now is an ideal time for developers to move forward with confidence that the investment will provide a promising return, as it typically takes about two years to move through the development process.
By Michel D. Hibbert, Senior Managing Director at Charles Dunn Company. This article originally appeared in the January 2015 issue of Western Real Estate Business magazine.