Los Angeles Rents to Spike in 2013 if No Economic Downturn

Apartments in Los Angeles are still recovering from the downturn in late 2008.  Vacancies continue to decline and according to many surveys, now hover in the low 3% range.  Many sub-markets are actually below 3%.  According to PMI’s research, the last time apartment vacancies fell below 3% (in 1997 and 2006), strong rent increases followed.  The U.S. economy grew strongly in both 1997 and 2006, and we don’t know if we can say the same thing about 2013.  Rent growth may not be nearly as strong in 2013 as in those years.

However, Los Angeles vacancies are likely to fall below 3% if the economy does not take a turn for the worst.  As I result, one could expect rents to increase 10% over the next 18 months.  Indeed, several Los Angeles owners have experienced record low vacancies this year (1 to 2%).  Unlike the office market, where owners will incur high vacancy rates to achieve very high rents, apartment owners will allow their occupancies to drift down to very low levels before testing rents.  Apartment owners tend to be more cash flow sensitive, and apartment tenants tend to be very rent sensitive.  After a year of very low vacancies, apartment owners will begin to explore and test rents or eliminate concessions.

Different reports show that job prospects for young adults have improved.  This has encouraged them to start households after many years of living with roommates or their parents.  This trend also coincides with a move back to urban centers where apartment living is common and convenient.  Very little in the way of significant new apartment supply will be delivered during 2013.  Although home sales and prices are likely continue to improve also in 2013–residential financing still remains very difficult.  A move in the economy will either improve this forecast if positive or negate it if negative.

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