Is the party over? The apartment market has been on an exceptional run for the past four years. During the Great Recession we stumbled through a for-sale housing market in tatters, a weak recovery in the labor market that created mostly middling jobs for young workers, and benign supply growth. Combine all of the lackadaisical factors and you’ve hit the recipe for impressive strength it the apartment sector.
As they always say, all good things must come to an end. The for-sale housing market in Los Angeles County has again become vibrant…but that’s not the main use. Over-construction is.
For example, builders have completed another 1,400 rentals in the Westside Cities over the past year, representing a 1% rise in inventory. Research from Marcus and Millichap notes that the largest project to come online in the past year is Marina Del Rey’s Shores > 12 buildings, 544 units.
During the past year, vacancy jumped to 3.2% percent. Net absorption was negative > rents have peaked for the time being. Looking forward, experts expect Westside vacancies to rise to 3.4% in 4Q 2013. Average effective rents at developments constructed since 2000 dipped 5.3% year-over-year in the third quarter to $2,769 per month.
The trend toward excessive unit construction is a national phenomenon. New completions in the top 82 markets in the country averaged just 10,623 units per quarter in 2011 and 19,585 units per quarter in 2012. Over the first three quarters of 2013 new completions averaged 27,411 units per quarter. This is the highest quarterly average since 2009.
New completions in the top 82 markets for 2013 are expected to total roughly 124,000 units. 5,400 units were added in L.A. County. These amounts is on par with the long-term annual average of +/-120,000…but just wait, in 2014, new completions are expected to total about 164,000 units, well above the historical long-term average. Expect 9,000 units in L.A. County in 2014.
Although demand for apartment units will remain rather robust, it is unlikely the market will be able to absorb this many units, causing vacancy to increase. This would represent a pronounced change from the past four years, when vacancy was compressing rapidly as demand far outpaced a subdued level of new completions.
For more information please contact Jodi Summers and the SoCal Investment Real Estate Group @ Sotheby’s International Realty – or 310.392.1211, and let us move forward together.