Conditions Remain Tight, Construction Looming in 2014
The supply-demand balance will shift during the fourth quarter, though operations will remain sufficiently tight to afford operators a few more quarters of healthy rent growth. Currently, vacancy is in the low-3 percent range for regions on the western half of the county, which is providing operators sufficient leverage to lift rents more significantly than the pace of inflation. Countywide vacancy, meanwhile, is hovering in the high-3 percent area due to weakness in some of the eastern regions, such as the San Gabriel and Santa Clarita valleys. Rising rents would normally shift some apartment demand toward these areas, though thousands of underway units will limit renter migration. Of the 12,500 units currently beyond the groundbreaking stage, nearly 12,000 are in the western regions. Combined, the Greater Downtown, San Fernando Valley/Tri-Cities, South Bay/Long Beach and Westside Cities areas will absorb less than 2,500 units this year. At the current pace of demand growth, vacancy will push close to 4 percent next year as new supply competes with existing units. With rents already well above pre-recession highs, operators are anticipated to utilize concessions more broadly in 2014.
The gap between the number of buyers and sellers in the market is closing as more property owners list assets. The recent rise in interest rates has informed some owners that cap rates will increase in the coming months despite the prevalence of buyers in the market. Many sellers are attempting to finalize a deal before an influx of new construction begins exerting a greater influence on existing properties. In the current investment climate, Class A properties trade below 4 percent near the coast and up to the mid-4 percent range moving inland. Class B apartments have average cap rates in the mid-5 percent range, while Class C deals generally close at first-year returns in the low- to mid-6 percent area. Although the balance between buyers and sellers is shifting, multiple investors per listing is still common in the county. Many of these investors are undaunted by a potential cap rate hike due to real estate’s favorable position as a hedge against inflation.