/ YieldStar® Asset Optimization / Market Research Blog / Despite Strong Growth Recently, Concerns Remain Around Los Angeles’ Employment Picture

Despite Strong Growth Recently, Concerns Remain Around Los Angeles’ Employment Picture

Despite Strong Growth Recently, Concerns Remain Around Los Angeles’ Employment Picture

Recently, the economic picture in Los Angeles has improved, as the metro has posted strong annual employment gains throughout the first half of 2016. Most of those annual gains were due to hiring in the last half of 2015, when the metro added 114,000 jobs, on net. That was the strongest six months for job creation that Los Angeles has seen in more than 10 years.

However, the new job additions were largely in lower-paying services segments, continuing a four-year trend that has caused some concern in the Los Angeles apartment market. Relative to the metro’s overall employment growth over the past four years (1.8%), the lower-paying Leisure/Hospitality Services segment averaged four-year growth of 4.6%, while Education/Health Services averaged four-year growth of 2.6%. As growth in lower-paying employment segments bolster the economy, affordability across apartment product segments remains a concern in the long-run. This is especially true as apartment construction activity remains elevated and new deliveries are largely higher-end, Class A product.

While growth is robust in these employment segments now, the Los Angeles County Economic Development Corporation suggests in a recent report that the city will see the greatest annual average growth in Professional/Business Services (3.0%), followed by Educational/Health Services (2.5%) and Leisure/Hospitality Services (2.0%) from 2015 to 2020. In fact, roughly 67% of the 122,700 jobs forecasted to be added come from these employment segments. Though the Professional/Business Services category as a whole offers above-average wages, most of the projected job growth is in the lower-paying Administrative and Support Services. Likewise, the projected leaders for occupational segments in the Educational/Health and Leisure/Hospitality services categories command wages on the lower-end of the spectrum and require less formal-education than higher-paying segments. From a macro level, this raises structural concerns around the long-run economic prosperity in the metro.

Municipal leaders have focused legislation to address lower-income citizens’ financial pain. Last year, the Los Angeles city council approved a minimum wage increase to $15 an hour over a period of five years. The first increase took effect last month and requires private employers to pay at least $10.50 per hour. Additional increases will occur annually until 2021. Whether an increase in the minimum wage will make a dramatic impact to housing affordability in the long run remains an open question.

In the multifamily market, Los Angeles has recently benefited from a late recovery. Occupancy has tightened to levels between 96% and 97% for 20 consecutive quarters. Rent growth has also accelerated, averaging 6.3% annually over the last seven quarters, above the five-year average of 4.4%. Over the past seven quarters, annual rent growth has averaged 4.9% in Class C product, compared to the four-year average of 2.6%. Class A and B product averaged a combined 6.6% in the past seven quarters. A continuing concern within the metro is affordability among lower-end product and the lack of new supply available to serve this segment in the marketplace. In 2015, the California Legislative Analyst’s Office issued a report that identified Los Angeles as the state’s metro most desperately in need of additional housing of all types to meet unmet demand.Construction activity in Los Angeles is elevated, though net inventory has only expanded 0.6% on average over the last four years. Due to construction delays (a trend seen nationally), new product is entering the market at much lower rate. That said, the volume of units under construction has grown above 25,000, and once complete will expand existing inventory 2.3%. New supply entering the market is just one element that can potentially alleviate pressure from a pricing perspective.

Employment growth remains steady in Los Angeles, and has even accelerated in recent months. However, despite that acceleration, the quality of those jobs raises questions about future prosperity for Los Angeles, and a structural shift in the city’s employment composition. In the apartment market, this shift raises a persistent question around affordability, specifically around the growing delta between upper- and middle-tier Class A and B product and Class C properties. Looking ahead, residents already feeling pressure within Los Angeles will likely continue to relocate to peripheral metros (such as San Bernardino) with lower rent levels within the same product class with which they live in Los Angeles.

Ready To See What Investment Analytics Can Do For You?

Learn More