Los Angeles County's Multifamily Market Moderates Rent Growth, New Construction

January 2024 | J.C. Casillas , Managing Director, NAI Capital Commercial Research

In 2023, new construction drove up vacancies, while a new tax and borrowing costs contributed to a decline in sales.?

MARKET OVERVIEW

An influx of new multifamily construction is reshaping Los Angeles County's multifamily market. In Q4 2023, the vacancy rate increased by 60 bps compared to the previous year, reaching 4.9%. The primary factor driving this trend is the completion of construction projects, with a remarkable annual increase of 34.6% year to date. However, developers are slowing down as there has been a 14.1% annual decrease in the number of units under construction.

Despite rising vacancies during the year, the overall number of occupied units still increased by 4.7%, or 50,749 units compared to Q1 2020 – pre-pandemic. Moreover, the addition of 61,814 newly completed units to the market has contributed to the creation of a more competitive rental market. This quarter, the average rent modestly decreased by $10 from the previous quarter to $2,169 per unit, while still showing a three-tenths of a percent increase from last year. The continuous completion of newly constructed multifamily housing units is having a softening effect on Los Angeles County's rental market.?

While the number of units sold rebounded from the previous quarter, the year-over-year number of units sold has seen a significant drop of 45.6% year to date compared to 2022, reminiscent of the financial tightening during the Great Recession. Investors are grappling with a price disparity with sellers due to rising interest rates, tight credit, and softening market conditions, resulting in lower transaction volume. The average cap rate increased by 60 bps from last year, while the average sale price per unit witnessed a significant 23.1% drop.

TRENDS TO WATCH

The Federal Reserve's overarching objective of raising interest rates to curb economic activity has influenced the multifamily sales market. This impact is evident in reduced investment demand and heightened credit costs for developers and investors. As credit conditions tighten, the multifamily market is adapting to increased borrowing costs, substantial inflation, a less robust growth outlook, and heightened financial risks. By yearend 2023, there was a double-digit year-over-year increase in vacant units in L.A. County, accompanied by a significant 58.2% decline in sales dollar volume from 2022.

Additionally, Measure ULA in the City of Los Angeles, implemented as of April 1st, 2023, has imposed a new property transfer tax on real estate sales over $5 million. This measure has significantly impacted the sales volume of apartment buildings valued over $5 million in the city. The sales volume of these buildings recorded a staggering 67.3% decrease year over year, with the number of deals sharply down by 52.1% from the previous year, landing 14% below the levels observed in 2020 during the pandemic shutdown.

In contrast, the sales volume for apartment buildings under the $5M threshold in the City of Los Angeles increased by 5.7% from 2022, with the number of deals up by 10.3% year over year. This trend reflects the overall market conditions, where sellers with assets over $5M are more often unwilling to sell. In a backdrop of a soft rental market, new taxes, and elevated interest rates, the market is expected to moderate.