By Christina S. Porter
Since 1995, growth in demand for housing in the Los Angeles Basin has outstripped growth in supply by a factor of 1.6 to 1. As a result, vacancy rates have fallen to the 3 percent to 4 percent range basin-wide and below 3 percent in the most desirable areas.
Doubling up has occurred once again, and rents and housing prices have skyrocketed. The median asking rental rate in the region is up 40 percent in the past five years and the median for-sale housing price is up 75 percent. Rents on quality product in quality locations (such as the Westside, Glendale, Pasadena and Burbank) have reached the low $2 per square foot level. Reasons for the shortfall in supply include a lack of vacant land within the urbanized portion of the basin (a relatively new phenomenon for Southern California), as well as an increasingly onerous entitlement process.
The strong market conditions and restraint on future supply have combined with exceptionally low interest rates to bring extraordinary demand from investors for apartments within the Los Angeles Basin. In many areas, prices have doubled in the past five years, and now exceed $200,000 per unit in quality locations. Land prices also have approximately doubled in the past five years, and there is growing competition from condominium developers for land that previously would have been slated for apartment development. Mortgage rates have climbed in the past six months, but many investors have switched to adjustable, low-rate floater loans. These loans offer highly attractive rates to the short-term investor who is looking to flip his investment within 18 to 24 months. This shift has kept investor demand strong, prices high and cap rates low (low 6 percent range).
Outlook: The sharp increase in land prices and increased competition from condominium developers will serve to keep construction restrained. Demand from tenants will be strong, bolstered by a strengthening economy. Vacancy rates are projected to remain low, and may even reach hyper-tight conditions. However, there is a limit upon just how high rental rates can climb. With rent increases of 40 percent in the past five years, tenants are already stretched to the near-breaking point on rents. Therefore, we expect rent increases to be relatively modest (given the tight market), in the 2 percent to 4 percent range. We also expect to see increased doubling up and a shift in tenants to less-pricy areas. At the upper-end, we expect the ceiling to be the low $2 per square foot range for all but exceptional units (penthouses, etc.).
We expect cap rates to slowly climb as mortgage rates increase — they appear to be at unsustainably low levels at this time. However, the fundamentals of the market are too strong to expect a free-fall in prices. We expect a more gradual stabilization in prices to occur, as rents slowly rise. One wild card, 200 basis points or more, a price correction appears likely. Prices for apartment buildings have doubled in the past five years (The above is an excerpt from NAI Capital’s “Year End-2003 Market Report.” The market report is published quarterly and covers all different types of real estate in the Los Angeles Basin, Ventura County and Orange County, with the exception of single family residential. Christina S. Porter specializes in the leasing and selling of office and industrial buildings on the Westside of Los Angeles and beyond. You can call her at (310) 806-6104, or e-mail at)
Originally published in the Santa Monica Daily Press print edition on March 17, 2004. Read the original PDF.