10 Reasons Why Los Angeles is Positioned to Boom in the Second Half of 2021 and Beyond

With 2020 now behind us, we would like to provide an update on the state of the market, given these unprecedented times, together with a perspective on how COVID may impact Los Angeles and specifically urban infill apartment development properties.

Over the course of 2020, I had the opportunity to participate on multiple industry panels, podcasts, and interviews, listened to the opinions of many business leaders and economists, tracked vaccine progress, attempted to monitor human behavior, and studied resulting trends and data in our local markets. This broad and direct industry exposure has lead me to suggest some ideas about sector performance, and behavioral shifting within our business.

It is clear that the pandemic has negatively impacted hotels, office, and retail, while data centers, self-storage, single family homes, life science, and industrial assets have performed well. The pandemic’s impact to the apartment sector is more locationally dependent. As more companies allowed their employees to work remotely for longer periods of time, a new phenomenon developed known as the “urban to suburban shift,” whereby large numbers of people began to exit densely populated and expensive coastal cities for less costly suburban areas where they could have more space. Although Los Angeles has fared better than denser urban centers that rely on public transit (such as San Francisco, Chicago, Boston, or New York), apartment rents in Los Angeles are down and occupancies have dropped.

However, LaTerra believes that urban apartments are still a favored asset class for investors over the long term, and urban infill apartments in Los Angeles delivering in the second half of 2021 or later are well positioned for the following 10 reasons: 

1. Timing, Timing, Timing: Many experts predict a strong economic recovery for Los Angeles starting as early as the spring of 2021. CBRE is projecting positive rent growth of 16% in LA County in the year 2022. Additionally, interest rates are expected to remain low for the next few years, which should continue to compress cap rates for some time.
2. Vaccine news: Both Pfizer and Moderna received Emergency Use Authorization (“EUA”) from the FDA for their vaccines, which have efficacy of approximately 95%. Additionally, Johnson and Johnson’s single shot Phase III vaccine data is projected to be released in January with EUA projected in February, Oxford’s AstraZeneca has reported high efficacy with a vaccine that does not require freezing, and Novavax expects Phase III results at the end of 1Q21—even one of these three vaccines should significantly improve the timeline to vaccinate the general public. Additionally, CVS, Walgreens, and Costco recently announced that they are partnering with the U.S. Department of Health and Human Services to help distribute the vaccine. Dr. Fauci estimates that by April 1, 2021, all Americans will have access to a vaccine. Once a vaccine is widely available, it is anticipated that companies will bring employees back to the office, college campuses will open, nightlife will return, and demand for urban apartments will rise.
3. The Media Biz – it’s set to BOOM locally and in person: Los Angeles is the techtainment (technology meets entertainment) capital of the world. Netflix, Apple+, HBO, Hulu, Amazon Studios, ShowTime, Viacom, Peacock, Disney, etc. produce their content in Los Angeles. According to CBRE, at least half of North America’s 11 million square feet of soundstages are located in Los Angeles. There is a huge backlog of content that will be produced in the LA/ Hollywood production ecosystem starting in 2021. Unlike the tech sector, which can operate remotely to a large extent, the media areas of casting, screen writing, script reading, production and post production happen in person. Netflix co-CEO Reed Hastings stated in a Wall Street Journal interview that as soon as a vaccine becomes available, Netflix employees are getting back to work in the office. Reed Hastings sees “no benefit to work from home,” which stifles creativity and human connection (he did say Netflix may allow for one day of virtual work a week post pandemic). Additionally, Sundar Pichai (CEO of Google), which has a large presence in LA (including its ~600,000 square foot lease in 2019 of the former Westside Pavilion mall and YouTube’s headquarters in Playa Vista) told employees that starting September 1, 2021 “you will need to work from your assigned Google office and will be expected to live in commuting distance of your assigned offices.”

While few new office leases are being signed nationally, the following datapoints show that media companies and institutional investors are committed to Los Angeles - all of the below activity occurred post onset of the pandemic:

• Netflix signed a 170,000 square foot lease at Empire Center (~5 minute drive from both of LaTerra’s Burbank sites) for their new Animation Division. Netflix is purportedly taking more space in Burbank as they grow this division to compete in the backyard of other animation firms including Disney, Nickelodeon, Cartoon Network, Titmouse, and Warner Brothers. (Sep 2020)
• Disney renewed their 420,000 square foot lease for their global headquarters located in Burbank (~10 minute drive from both of LaTerra’s two Burbank sites). In a recent presentation to investors, Disney Executive Chairman Bob Iger laid out an aggressive plan to grow Disney+ and other streaming businesses, including Hulu and ESPN+, to as many as 350 million combined subscribers in the next few years. (Oct 2020)
• Apple acquired 160,000 square feet in Culver City (~10 minute drive from LaTerra’s Venice sites) to allow for an expansion of Apple+, their content creation platform. Apple previously announced they plan to hire about 1,000 employees locally for Apple+. (Dec 2020)
• EA Sports signed a 52,000 square foot lease at Del Rey center (~5 minute drive from LaTerra’s Venice sites). (Nov 2020)
• LA Studios North signed a 113,640 square foot lease in Santa Clarita. The space will be used as a production and soundstage for Amazon Studios, Netflix and Disney. (Dec 2020)
• Northwestern Mutual acquired a 92,000 square foot office building in Santa Monica (within a short walk of LaTerra’s two Santa Monica sites), leased to Universal Music and Illumination, for $166M or $1,810 psf (setting a record price per foot in LA). (Nov 2020)
• Blackstone acquired a 49% stake in three Hollywood studios owned by Hudson Pacific (1.2M sf and 35 stages) at a $1.65B valuation (about a 5 minute drive from LaTerra’s Los Feliz sites). (July 2020)
• LPC West and Russel Geyer paid $186M ($712 psf) for a 261,000 sf office complex location in Hollywood at 959 Seward (about a 10 minute drive from LaTerra’s Los Feliz sites). (Dec 2020)
• Blackstone and Worthe are building a 500,000 square foot speculative office building in Burbank – by far the largest new post pandemic spec office development in the country (~10 minute drive from both of LaTerra’s two Burbank sites). (Nov 2020)
• Lendlease and Australian pension fund, Aware Super, acquired a large mixed use site in West Adams for $92M to build 500,000 square feet including 250,000 square feet of spec office in a $600M development (~12 minute drive from both of LaTerra’s Mar Vista sites). (Jan 2021)

4. Home values have increased, which will push more people to renting: In Los Angeles County, the median home sale price rose 12.2% over the last twelve months to $700,000, while new home sales are up 13.1%. As the cost of home ownership increases (especially for homes within a reasonable commute time to the workplace), more people will look to rent an apartment.

5. Los Angeles is like one big suburb (outside of Downtown LA): While almost all of Los Angeles has experienced rent declines due to COVID, Los Angeles is sometimes described as one big suburb (outside of downtown Los Angeles, which is the most negatively impacted submarket in LA). Tenants seeking more space, walkable neighborhoods, and outdoor space can obtain that in Los Angeles’ numerous neighborhoods. In the post pandemic world, Los Angeles will benefit from the fact that residents do not rely on public transportation to get to work.

6. Los Angeles’ large and prestigious universities: LA has numerous colleges and universities that attract employees and also create a meaningful demand for housing across LA. Due to covid, most of these students are now living at home. Once a vaccine arrives and schools re-open (presumably no later than the fall of 2021), demand for housing in many submarkets of Los Angeles will increase as students will move out of their parents houses and will rent an apartment. Additionally, many students at schools such as UCLA and USC stay local in Los Angeles after graduating –enhancing job growth and housing demand.

7. Weather and outdoor space: Los Angeles has beaches, outdoor space, and year-round great weather that will always be attractive, perhaps especially in a post pandemic world.

8. Record savings: Household savings are the highest they have been since the end of World War II. Home owners also have significant home equity. Once the pandemic ends, it is projected that consumers will spend at higher amounts just as they did following the war time.

9. Capital on the sidelines/ record liquidity: Going into to the pandemic, there was a record amount of institutional capital looking for Los Angeles apartments. As the effects of the pandemic wind down, an increasing amount of now sidelined capital will be invested. Los Angeles apartments will remain a favored asset class going forward.

10. Mom’s basement is no fun!: Currently, there are more people in the 18-29 age range living at home with their parents than at any time since 1940. Once the pandemic ends, cities open, nightlife resumes, and schools return to in person classes, it is anticipated that more young people will move back to the city to live on their own and rent an apartment.

Many industries, cities and families across the globe have been negatively impacted by COVID. Far too many have lost jobs or love ones. This devastation saddens all of us. While the real estate sector has not been immune and apartment rents in Los Angeles have declined, LaTerra counts its blessings that our employees have been healthy and we have been permitted to work as an essential business. In fact, to meet our growth demands, LaTerra has added six people to our staff during the pandemic. LaTerra remains optimistic about Los Angeles, its demand drivers, and the ongoing housing shortage that drives our business. 

I often ask people “do you know what followed the Spanish Flu of 1918?” The answer, of course, is the “roaring 20s!” During the Spanish Flu, people thought cities were dead. It didn’t happen that way as people want to be where the action is. My hope and belief is that once again we will be entering the “roaring 20’s” – this time, the 2020s!

Chris Tourtellotte