Los Angeles Apartment Sector Gains Strength

Los Angeles?County denizens may have to worry more about water shortages, earthquakes, and state budget shortfalls than the average American, but at least relief is finally in sight for job-hunting residents. The county’s stronger hiring efforts this year will benefit multifamily owners, as well, bolstering rental-household formation and spreading the recovery of the area’s apartment market beyond infill communities. Consider that occupied stock rose in the county last year, as well, stemming from the release of pent-up demand and strong absorption in desirable pockets of the metro, including the Westside cities, where renters took advantage of opportunities to lease units at discounts. In 2011, beach communities and close-in areas of the San Fernando Valley will attract a large share of returning and relocating renters, but the broadening employment recovery and eroding concessions in premier areas will help strengthen other parts of the metro, too. Rising international trade and port activity, for instance, will generate transportation- and warehousing-related jobs in the hard-hit Long Beach market, enabling more residents to lease lower-tier rentals.

Elsewhere, Greater Downtown property owners will get a reprieve from supply-side pressure this year, after extended development timelines resulted in a significant number of new units during the recession. As re-employed young professionals migrate to rentals closer to work, demand for downtown apartments will strengthen, fueling the area’s first annual vacancy decline since before the downturn. And that bodes well for investors considering La La Land.

Help From Home Sales

While challenges in the housing market remain a drag on the broader economy, the market’s downturn has benefited apartment owners in Los Angeles County. Despite increased affordability, attractive mortgage rates, and the strengthening employment outlook, home sales continue to languish at a cyclical trough. Major hurdles facing the recovery of the housing market include tight lending standards, depleted savings, changing housing preferences, and, most significantly, extreme caution by prospective homebuyers who fear additional value declines. Though the economy will continue to improve as other sectors compensate for housing weakness, future economic growth will likely remain restrained by the housing industry through 2011.

Recent home sale trends indicate the housing market has yet to enter an organic recovery since the expiration of government incentives. Nationwide, February existing-home sales fell 8.9 percent from January, while new-home sales, which are competing against discounted REO listings, reported a steeper decline. As homebuilders moved to overcome buyers’ preference for bank-owned listings, and as lingering winter storms curtailed house hunting, the median price for new homes dropped

14.9 percent during February. With new-home inventories at record lows and home building activity at a virtual standstill, however, pricing volatility will likely subside through the spring season.

Despite the single-family housing market’s challenges, Los Angeles is finally experiencing job growth. Employment levels in Los Angeles County expanded by 0.6 percent, or 22,100 jobs, year over year in the first quarter, a sharp turnaround from the loss of 132,100 positions in the preceding 12 months. The education and health services sector leads the region in job creation. The addition of nearly 11,900 employees during the past six months brought the sector’s year-over-year total gain to 15,500 workers, a 3 percent increase. The information sector also posted considerable growth, expanding by 11,900 positions, or

FAST FACT: Los Angeles County

POPULATION:?9.88 million

MEDIAN AGE:?35.4*

MEDIAN HOUSEHOLD INCOME:?$52,570*

AVERAGE ASKING RENT:?$1,401?

VACANCY:?3.9%?

UNEMPLOYMENT:?12.3%**

NOTABLE:?With nearly 10 million people, L.A. County is the most populous county in the nation. More than 36 percent of the county’s residents are foreign-born, compared with 26 percent for all of California. The entertainment industry’s biggest film studios—Paramount Pictures, 20th Century Fox, Sony, Warner Brothers, Universal Pictures, and Walt Disney Studios—are based there. Other major industries include international trade (the ports of Los Angeles and Long Beach together constitute the fifth-busiest port in the world); music; and aerospace.

* Estimated ? Projected year-end 2011

** As of March 2011

Sources: Bureau of Labor Statistics; City-data.com; LACounty.gov; Marcus & Millichap Research Services; Reis; Wikipedia

6.3 percent, over the past year. Total employment in the county will increase by 56,000 jobs this year or 1.5 percent. In 2010, employers hired only 11,700 workers.

Jolted by Jobs

Developers completed more than 3,400 apartment units on a year-over-year basis through the first quarter, expanding the metro’s rental inventory by 0.5 percent; no projects came on line in the first quarter of 2011. In the previous 12-month stretch, apartment deliveries totaled 1,680 units. As of the first quarter, approximately 1,260 apartment units and

630 for-sale units were under construction. The apartment planning pipeline contains 14,400 units, though fewer than 900 of these have set groundbreaking dates. Local apartment developers will bring on line 1,180 units through year’s end, down significantly from the 3,940 units completed last year.

In the past 12 months, job-creation resumption in several sectors, combined with former homeowners returning to rentals, drove a 100 basis point vacancy improvement, to 4.5 percent. Owners raised asking rents 0.1 percent in that time, to $1,372 per month, and increased effective rents 0.8 percent, to $1,319 per month. Class A vacancy fell 150 basis points over the past year, to 5.4 percent, fueled by renters re-entering the apartment market and leasing discounted units.

Vacancy among Class B/C complexes dipped 60 basis points, to 4.2 percent. In the coming year, lower-tier units will likely record a stronger improvement as the job market recovery filters into blue-collar sectors. Vacancy rates for all properties will retreat 100 basis points from 2011, to

3.9 percent. During 2011, asking rents will rise 2.1 percent, to $1,401 per month,

In the mid-1980s in North Hollywood (NoHo), the three-building, 100-unit Morrison Apartments sold in April for $13.3 million. Between 2007 and 2009, the property’s units were moderately upgraded and included gas stoves, two-tone color schemes, and dishwashers. The NoHo Arts District is part of North Hollywood’s recent transformation into an increasingly lively urban setting replete with theaters, art galleries, and cafés.

Like employment and vacancy, investment sales are also climbing. Velocity increased nearly 10 percent during the most recent 12 months, as low-interest rates encouraged more investors to restructure their portfolios. One year earlier, transaction volume decelerated 22 percent.

The median price for an apartment asset sold in Los Angeles County over the past year was $130,100 per unit, up 2 percent from 12 months earlier. Well-capitalized buyers are increasingly pursuing high-quality properties in coastal areas, while smaller investors have opted to target value-add plays. As these groups bid up prices this year, investors’ attention will turn more toward relatively stable mid-tier properties.

Velocity will continue to rise through 2011 as recovering rent rolls and low-interest rates pull private equity into the marketplace. Individual investors prepared to deploy stockpiled capital will target properties with fewer than 50 units, to avoid committing large sums to any one asset. Value-add buyers seeking properties with some component of distress will consider communities overlooked during the recession, including outer areas of the San Fernando and San Gabriel valleys. Deal flow in these areas has already strengthened, and current listings boast cap rates in the mid–6 percent to low–7 percent range. Wealth-preservation transactions will still center on premier areas of the county, such as the Westside cities and South Bay. Last year, demand from high–net-worth buyers and institutions pushed down cap rates for the most sought-after coastal assets into the low–5 percent range.

With so many aspects of its recovery showing encouraging signs, Los Angeles County will be a market to watch this year and beyond.

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