Annual growth in effective rents for new leases in metro Los Angeles apartments reached 4.2% as of Q3 2014. For the first time in this cycle, then, LA is registering rent growth a little bit above the average pace for the nation as a whole.
Some regard this performance as a return to a normal position for Los Angeles, since the metro has tended to realize rent growth stronger than the U.S. average over its long-term history. Others regard current results as a blip to some degree. This is a late-recovery market in terms of its overall economy, so today’s healthier rent growth can be viewed as mostly catch-up momentum experienced in many other parts of the country two to three years ago.
From the viewpoint of MPF Research’s analysis team, whether or not Los Angeles can maintain a rent growth premium overall during the near term largely comes down to what happens in the metro’s large stock of class B to C product. While the very best and very worst units in LA are posting solid rent growth of 3% to 4%, it’s the growth of more than 5% in the units from the 1980s and 1970s that has really started to move the needle.
A positive for the prospects in class B to C product in Los Angeles is that there’s a huge amount of room between the monthly rents for these units, about $1,500, and the prices commanded by the class A stock, roughly $2,300. (Class A- to B+ units register monthly rents around $1,700, but there are too few of them to have much impact on the rent-by-product-class comparison.)
The argument against sustained robust rent growth in LA’s class B to C apartment product comes down to simple affordability considerations. The share of income that residents of these communities spend on rent is already pretty high by national standards, and Los Angeles remains among the country’s under-performers when it comes to wage growth so far in this economic cycle.
MPF Research is anticipating that class B to C apartments will continue to achieve the most rent growth by product niche in LA, but that the size of that premium should shrink to around 100 basis points, rather than 150 to 200 basis points. The wild card in the size of that premium may be how aggressively this product gets traded, with new owners coming in and making property upgrades that perhaps could sustain more aggressive rent upturns.
While the class B to C apartment stock in metro Los Angeles is spread out across the area, key spots to watch for important performance patterns within this niche will be the San Fernando and San Gabriel Valleys as well as Hollywood and Southeast Los Angeles. Although those neighborhoods don’t comprise unusually large shares of the metro’s total class B to C inventory, they are areas where almost all the stock within the individual submarkets consists of this middle-market apartment inventory.