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High Cost of Homeownership Sustains Rental Demand; Investors Target Locales With Higher Return Thresholds


Tight conditions preserved amid wave of supply additions. In each of the previous three years rental demand in Los Angeles outpaced elevated levels of construction activity, compressing vacancy to a cycle-low level entering 2020. Limited unit availability occurs at an opportune time, as the county’s rental inventory will swell by an additional 14,000 units this year, the third-largest total among major U.S. metros. While core Los Angeles continues to record the largest influx of new apartments, deliveries are more evenly distributed between Downtown Los Angeles, Mid-Wilshire and Hollywood than in previous years. Elsewhere, the San Fernando Valley will record a large increase of new units, welcoming more than 4,000 rentals, 40 percent of which are in Woodland Hills. Throughout the county, projects in lease-up will benefit from steep home prices and income growth, but concessions usage will increase as developers seek to achieve stabilization in under a year. With solid demand drivers in place, the overall impact of cycle-high delivery volume will be moderate, with metro vacancy rising to 4 percent.



High Home Prices and Income Disparity Create Foundation for Long-Term Apartment Demand


Supply additions dip amid tight conditions. Apartment availability adjusted nominally over the past six years as newly penned leases outpaced the delivery of 21,000 units over that span. In 2020, the metro’s median household income will approach $100,000, but a significant gap between a mortgage payment and average monthly rent exists. The high income will continue to aid leasing activity at newly built complexes, while strong leisure and hospitality hiring with typically lower-paying jobs will sustain demand for Class B and C apartments. With Class A vacancy at its lowest point this cycle, an influx of new rentals is needed, yet delivery volume trails the prior five-year average by 1,400 units. Upcoming properties are large in nature, averaging 300 doors, with supply additions concentrated in Santa Ana, Irvine and Anaheim. In these locales, vacancy could rise on a short-term basis; however, the metro’s overall vacancy rate holds at or below 4 percent for a seventh straight year, ranking Orange County as one of California’s tightest markets.


Demand for apartment housing remains at peak levels as the extended growth cycle spurs
household formation that exceeds the elevated pace of construction


Over the past decade, nearly 2.7 million additional apartments have been filled, more than triple the net absorption of the first 10 years of the millennium. This has pushed vacancy rates to their lowest level since 2000 and delivered 10 years of steady rent growth. Looking forward, the pace of absorption will slacken in 2020, not because of reduced demand, but because of supply limitations. Class C properties provide the most dramatic illustration of the 10-year trend, with the national average vacancy rate falling from 9.4 percent at the beginning of 2010 to a record-low 3.3 percent as of the third quarter 2019. With so little slack left in the rental housing stock, even the addition of 300,000 new units in 2020 will have little impact on the market.

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