2016 was a record setting year for LA Multifamily, and 2017 continues strong
Nearly $10 billion was invested in Los Angeles County during 2016, including more than $3 billion in 4Q alone (CoStar), which was spread fairly evenly across the County. Investor demand remains wide and deep, including both national investors and considerable foreign investment. L.A. is currently considered one of the best US cities for real estate investments for long-term capital preservation.
Demand Remains HIgh & Supply increasing but mostly in Class A and Downtown
A strong labor market (especially in the hospitality and healthcare sectors), trends toward urban living, and high housing prices are driving renter demand. Rents grew approximately 5% for 2016 and rent growth expectations for 2017 are a similar rate (5.4% - Marcus & Millichap). Representing a plus for future supply, the highly contested Measure S was defeated in March, which targeted the practice of changing city rules to permit buildings that are taller or denser than the established restrictions would ordinarily allow and would have imposed a moratorium lasting up to two years on building projects that require zone changes and other alterations in city rules. With the massive housing shortfall facing SoCal, the measure would have exacerbated the problem, further restricting the needed supply of additional housing units to take the pressure off of pricing and rents.
New units under construction
Above is a chart of units under construction, showing deliveries increasing into a long-term high, with much of the new supply in the long stigmatized but resurgent Downtown LA (DTLA), so much so that vacancy rates (10% according to one report, compared to County average of 2-4%) and concessions have begun to push up, making lenders more cautious on new projects in the submarket.
Strong absorption and rental rate growth is drawing new development, but to date much has been in high-end Class A properties. The reasons are simple. Building and land costs are both very high, so much so that new construction of Class B and C product in nearly all areas simply isn’t profitable. This is a potential opportunity for value-add investors, since affordability is a huge issue in SoCal and the lack of new supply for lower rent properties will likely continue to drive positive fundamentals for these properties into the future.
DTLA and other Submarket growth
Here's a view of the new DTLA skyline showing projects recently added and further below a few of the largest projects underway:
Circa, slated for delivery in spring 2018, is a $500 million mixed-use development, and one of multiple large-scale multifamily projects currently under construction in DTLA
Wilshire Grand Center, a 1.6 million square-foot office, hotel and retail tower being developed by Korean Air — now the tallest structure west of the Mississippi.
The 2.1 million square-foot Metropolis Los Angeles, four glassy high-rise towers being developed by Greenland Group, China’s largest real estate developer, which is state-owned.
In addition to DTLA, two of the submarkets seeing the most activity in new development are Hollywood & Koreatown, both of which allow higher density new development and have recent expansions or renovations to Metro stops--LA's public subway system.
Data from LA City Planning
"Silicon Beach" as it is now termed, which is an area that is welcoming new high-tech developments from Google, Yahoo and many others and includes Venice Beach, Marina Del Rey, Playa Del Rey, and Westchester is currently undergoing a mini development boom. In addition, outlying areas all around the city including the South Bay, San Fernando Valley, Glendale, Pasadena and the San Gabriel valley are all seeing a run in new development and rehab projects as a result of the rent and pricing pressure.
Pricing remains rich
Pricing is rich and shows no signs of letting up--with average cap rates declining to the mid-4% range, and many value-add, even rent controlled deals trading into the 3% range on in-place income. Smaller investors are having to compete with deep pocketed and institutional players on premium assets and the most popular west side neighborhoods, which is driving many into smaller and more "affordable" deals in less desirable neighborhoods in search for yield. The average price per unit on closed transactions topped over $260,000 in the past year, with the highest on Westside properties, which averaged $530,000 per unit (Marcus & Millichap).
