David Rich, Sperry Van Ness – Rich Investment Real Estate Partners
Improvement in apartment fundamentals has remained strong and is expected to continue over the next two quarters. The unemployment rate in Los Angeles County was 7.6 percent in March 2015, which represents a 100 basis point decrease from the same period last year. Supported by steady job growth, more than 108,000 new jobs are forecast for Los Angeles County in 2015, representing a 2.6 percent improvement over last year’s performance.
A significant amount of units are currently under development and more are expected to come on line later this year. Issuance for about 7,446 multifamily units is forecast for 2015, and issuance is expected to rise to more than 17,000 units in 2016 and 2017 with the anticipated absorption of about 11,800 units over that same period. That said, developers are likely to relax their efforts to obtain new permits into the latter half of 2015 based on an expected modest uptick in vacancy. Currently standing at 3.2 percent, the overall vacancy rate will likely increase to 3.5 percent by year-end.
The average year-over-year rent increased about 2.5 percent depending on the individual submarket. The greatest level of appreciation was represented in the South Glendale/Highland Park submarket where asking rents rose 4.2 percent to $1,538 per month on average. Comparatively, rent growth in the western coastal submarkets of LA County rose 2.7 percent. It is projected to rise another 2.6 percent, to $2,504 per month, through the remainder of this year.
Favorable market fundamentals, combined with a lack of alternative investment opportunities, continue to attract capital to this sector of the market. Accordingly, multifamily prices are up about 5 percent on the year. They’re currently about 14 percent ahead of the peak prices seen in 2007. Buyer composition remains broad, with capital coming from private (still the majority), public, institutional, cross border and equity funds. Average cap rates for Los Angeles ended at 5.5 percent in 2014. They had decreased an additional 20 basis points in the first quarter of 2015. Forecasts call for cap rates to compress an additional 25 basis points by the end of this year.
Looking forward, the primary concern continues to be interest rates. While the Fed seems intent on raising its benchmark rate, growth in the overall market remains moderate enough to delay any increase until year-end and perhaps even beyond that. Anything short of a 25 basis point hike in rates this year should keep multifamily investor demand strong heading into 2016.
By David Rich, Managing Partner, Sperry Van Ness – Rich Investment Real Estate Partners. This article originally appeared in the June 2015 issue of Western Real Estate Business magazine.