Record Apartment Rents Persist In Los Angeles, But Growth Has Stalled

Los Angeles County’s multifamily market is slowing, but renters in the area are still paying record rates for places to live. Preliminary data shows that vacancy rates in the region are creeping up and rents, though technically growing, are doing so at a fraction of a percentage point.

The monthly average rent rose to $2,164 per unit, preliminary data from NAI Capital shows. That figure represents another record high on the surface, but it is also a mere 0.7% increase from the same time last year.

“When you look at the absolute number, it's still a historical high. You can't deny that figure,” NAI Capital Managing Director of Research J.C. Casillas said.

The slowdown is a continuation of trends seen at the end of 2022, when record rents and slowed rent growth, then in the single digits, signaled a slowdown from the breakneck pace seen earlier in the pandemic. 

It’s a phenomenon playing out across the country. Asking rents for new leases rose slightly less than 2% in the 12 months ending May 2023, a sharp contrast to the double-digit increases of 2022.

The widespread nature of the rent growth slowdown doesn’t seem to be comforting those in the multifamily business. 

“Rents have remained stagnant year over year, concerning investors and landlords in addition to high inflation and interest rates,” a report from NAI Capital reads. 

The heightened cost of borrowing, uncertainty about the larger economy and less-than-stellar market perception are clamping down on the pipeline of new construction in LA County, Casillas said.

Stepp Commercial principal Kimberly R. Stepp said investors are exercising caution in the market now.

"Rising vacancy rates and slightly increased overall rents have kept Q2 2023 somewhat stagnant," Stepp wrote in an email to Bisnow. Measure ULA and the steady increases of interest rates "kept the market in a wait-and-see approach."

Preliminary data for Q2 2023 found vacancy rates increased by 20 basis points quarter-over-quarter, hitting 4.4%. That figure represents a 70 basis point increase year-over-year, according to NAI Capital. 

New construction had been on the rise in LA County, a “primary driving force” behind an uptick in vacancy in the area. But the number of multifamily housing units under construction this quarter to date has decreased by 6.7% from the previous quarter, with a year-over-year decline of 4.9%.

“You're not going to jump in if you don't think that you're going to be able to make a profit based on the interest rates and where rents are going,” Casillas said. 

The number of units sold has dropped by 64.3% compared to Q2 2022, “as investors have retreated due to tight credit conditions and a disparity in prices between sellers and buyers, resulting in a transactional standoff,” the report states.

Higher borrowing costs, inflation and perceptions of weaker growth and greater risks in the market are taking a toll. Preliminary Q2 2023 figures show that every submarket in LA County has seen a decline in the median sale price per unit compared to this time last year, NAI Capital found. 

The submarket that NAI Capital uses to cover LA’s Westside saw per-unit prices for apartment buildings fall 35.2% compared to Q2 2022. 

The city’s new real estate transfer tax, Measure ULA, might be playing a role in some of those figures but NAI Capital’s data tracks the county of Los Angeles and the new tax applies only to properties in the city of Los Angeles. 

Despite the droop in prices, in individual transactions, "well-located properties have maintained their value levels overall," Stepp said. "Buyers and sellers are bridging their divide, in terms of their own valuations but with that said, there seems to be a shift bubbling to the surface. I feel that deal flow will begin to ramp up in Q3, as the market seems to be finally settling and the volatility or stagnation will subside."