Los Angeles Multifamily Market Report As of June 8, 2023

Los Angeles Multifamily Market Report As of June 8, 2023

Los Angeles apartment market conditions provide mixed signals. Several data points suggest the market has stabilized in 2023. Rents, which saw slight declines late last year, reached a floor in early December. Renter demand has improved in recent months compared to the negative net absorption witnessed late last year. While property managers are providing more generous incentives than a year ago, the percentage of properties offering concessions, around 16% at the end of April, has declined from a recent peak of 22% in October 2022.

However, on a market-wide basis, vacancy, at 4.6%, continues to increase and is up from a recent low of 3.7% in 22Q1. Both demand and supply have precipitated the increase. Net absorption during the past 12 months, 3,200 units, represents a dramatic deceleration from the record 32,000 units absorbed in 2021. Renters continue to be cautious as inflation remains elevated and economic uncertainty persists. Also, absorption was insufficient to offset the 11,000 net new units completed during this time. While rents are rising on a year-over-year basis, rates have only increased by 1.0% during the past 12 months.

With 25,000 units under construction, representing 2.4% of inventory, and moderate tenant demand anticipated in the near term, vacancy is expected to continue to rise through the remainder of the year. The impact of completions going forward will disproportionately affect the locations where activity is concentrated. 20% of the units underway are in two submarkets, Downtown Los Angeles and Koreatown, which comprise only 10% of existing inventory in Greater Los Angeles. In contrast, many other submarkets will face limited supply pressures.

Based on conversations with local multifamily sales brokers, the increase in debt costs and tighter lending standards have impacted transaction activity since the second half of last year. The number of properties that traded in the past three months is well below the 640 properties that traded quarterly, on average, during the past decade. Many buyers and sellers have different expectations for pricing. Sellers want the elevated pricing seen in early 2022, whereas buyers seek a discount, given higher debt costs making it more difficult to achieve targeted investment returns. Several local brokers have said many buyers expect a 10-20% discount relative to early 2022 pricing. Transactions that are closing are seeing discounts in pricing compared to what have likely been achieved in early 2022. The rise in debt costs and additional transfer taxes passed by the City of Los Angeles and Santa Monica (see sales section for additional detail) will likely suppress near-term transaction volumes and lead to downward pressure on asset values.

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