Much Ado About Downtown Housing Vacancy
Los Angeles Downtown News
By Eddie Kim
October 10, 2017

DTLA – The Downtown Los Angeles construction boom has produced a glut of new apartments, and despite a steady influx of residents, the community has seen its vacancy rate soar to levels not seen in decades.

The Downtown vacancy rate is currently at 11%, according to real estate analysis firm CoStar Group. That far exceeds the roughly 4% rate in Los Angeles County, and is almost double the second-highest submarket vacancy rate, Hollywood’s 5.8%.

The situation raises a natural question: Is the red-hot Downtown market finally cooling down with falling rents, or is this just a temporary dip as recently opened apartments are filled?

Downtown construction appears to be hitting a crescendo: Inventory growth that averaged around 3% annually since 2010 spiked to 8.5% between the second quarter of 2016 and the same time this year, with nearly 3,500 units completed, according to an analysis by property management firm RealPage.

More than 8,000 apartment units are currently being built in Downtown, with 5,000 expected to wrap up construction in the next 12 months, according to RealPage analyst Bill Kitchens.

This may be cause for concern for landlords, but there’s an upside for renters. The 1.5% growth in rents in Downtown in the past year is below the 3.5% rise across the greater Los Angeles area, according to CoStar.

The current average rent for a one-bedroom apartment in Downtown is about $2,550 a month. That’s out of reach for many people, but in the last two quarters, rent increases have been stemmed dramatically in “Class A” (think new buildings packed with amenities) apartments, according to RealPage data.

“Cuts in Class B units suggest competition at the top end of the market is trickling into middle-market product,” Kitchens wrote last month. “Annual rent cuts are likely to persist through most of 2018 as operators continue to focus on filling units over pricing.”

Developers of some new buildings are responding to the competition by offering concessions that, in practice, lower rents. For example, many new Downtown tenants can expect four to six weeks of free rent, and six months or more of free parking, according to local experts.

This environment may not last long. Occupancy is expected to rise in mid-2019, partially because of fewer units finishing construction, and also because of the ongoing regional housing crisis.

“Very low vacancy rates in the rest of L.A. County suggest that there’s still an undersupply of housing, especially at lower price points,” said Andrew Woo, director of data science at housing-listing company Apartment List. “Our recent analysis showed that the Los Angeles metropolitan statistical area added 4.7 new jobs per building permit from 2010-2017, which would drive up rents.”

Housing observers agree that a gap still exists between the people who can afford to live in new apartment complexes, which experts say targets the top 10% or so of the renter base in Los Angeles, and those who actually want to settle in Downtown L.A.

Still, the lag is a temporary phenomenon that could change within a short period of time, even several months, according to Petra Durnin, director of research and analysis for the Southern California region at real estate brokerage firm CBRE.

“All of L.A. is attractive to investors and developers for many reasons, and it’s unlikely with a history of very tight vacancy that a temporary rise would drive away investors or developers,” she said. “Multifamily will remain the highest and best use for developers beyond the next year or two.”

The amount of construction in Downtown L.A., plus rising construction costs and interest rates for construction loans, has made it harder to secure financing. Yet Downtown remains very attractive for certain developers, said Eric Sussman, a real estate expert at the UCLA Andersen School of Management who is also active in development.

“The cost of capital for Avalon Bay or Essex or Equity Residential or these big multifamily developers is still very low, and that might be keeping the boom up right now. I do think at the end of the day, the DTLA potential for high-end units is somewhat capped,” Sussman noted. “But in theory, if they can build and generate a yield of 4% or so, their investors are happy.”

In other words, it’s likely the apartments will keep getting built by national developers. Beyond the upside for renters, the release of so many units is a bonus for companies and firms looking to move Downtown. Large employers want to attract workers with diverse housing options and sell a live-work-play environment, CBRE’s Durnin says.

Similarly, interest from retailers remains strong in Downtown, according to broker Derrick Moore of the firm Avison Young. In fact, one of the biggest problems he’s observed is that there is a lack of spaces for certain large retailers within the Downtown core. A number of retailers are waiting for buildings to open with new retail space that doesn’t require complicated rehabbing, he said.

“As for residential, it’ll take 30 to 36 months to absorb all these units, but that’s going to have a tremendous psychological impact on retailers,” he said. “We’re going to move away from this emphasis on food and drink and more into lifestyle and essential retail, like CB2, Williams Sonoma, and large soft-good names like Uniqlo or Forever 21.”

Despite high vacancy, Downtown L.A. still suffers from a severe shortage of “workforce” (teachers, service workers, etc.) and low-income housing. Cracking that puzzle is daunting, but research suggests that in the future, the ongoing flood of new projects will be important to support a greater middle-class contingent of renters than exists today.

While it may take decades, the economic phenomenon of “filtering” as housing ages (and new, more desirable projects are built) is critical for lowering prices, according to economist Joe Cortright, who studies housing trends for the Portland-based think tank City Observatory.

“New housing is almost always built for and sold to the high end of the marketplace. It was that way a hundred years ago and 50 years ago,” Cortright wrote in a March story for City Observatory. “And the new self-styled ‘luxury’ apartments we’re building today will be the affordable housing of 2040 and 2050 and later.”

That is little solace to current residents in Downtown L.A. who are feeling the stress of rising rents, but perhaps it’s a silver lining amid the stream of endless cranes and construction.

Renters Wanted

Anumber of Downtown Los Angeles apartment buildings are offering concessions in the quest to woo renters. Here’s a rundown of some of the offerings, based on website details from last week. Restrictions and changes may apply, so call leasing offices for details.

Olive DTLA: A special at this recently opened South Park complex offers six weeks of free rent, plus half off the initial deposit, for those who move in by Oct. 20. Rents start at about $2,180 for a 500-square-foot studio.

Stoa: Holland Partner Group’s Historic Core project has 237 apartments — and every single one of them is eligible for one month of free rent. Rates start at $2,000 for a 480-square-foot studio.

Wren: As part of an October special, the South Park apartment complex is touting six weeks of free rent on a 14- to 17-month lease. Rents go from $2,250 for a roughly 500-square-foot studio.

Eighth & Grand: The 700-apartment complex opened in October 2015, but it’s still offering up to four weeks of free rent on new leases. Rates in the Financial District project start at around $2,200 for a 530-square-foot studio.

G12: The new project off Grand Avenue and 12th Street is offering up to seven weeks free on select units, plus a “look and lease” special that gives renters 12 months of free parking if they lease within 24 hours of a tour. Rents start at $2,175 for a 460-square-foot studio.

Sofia: The 606-apartment City West complex, from prolific Downtown developer Holland Partner Group, began first-phase move-ins in June and is offering six weeks’ free rent on certain units. Apartments start at around $2,200 for a 500-square-foot studio.

Watermarke Tower: It’s somewhat of a surprise that Watermarke, which opened in 2009, is still offering a nice freebie: two months of free rent. Rates begin at around $3,100 for a 860-square-foot one-bedroom unit.

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