Los Angeles will gain 14,000 new apartments this year. That could be a major hurdle for multifamily investors if a recession slows demand. Victor Calanog, Ph.D., Commercial Real Estate Economist, shares his take, leveraging data from Moody's Analytics CRE.
Los Angeles sees sharp decline in apartment rents
Los Angeles apartment rent growth fell precipitously in Q1 2023, with asking and effective rents both declining 2.4% . That is comparable to the most severe quarterly rent decline recorded during the worst of the pandemic, in Q3 2020, Calanog says.
On the positive side, vacancies remained somewhat stable in the Q1 2023, at 3.8%. Of LA’s 38 apartment submarkets defined by Moody's, the one that covers the Paramount/Downey/Bellflower/Norwalk areas experienced the largest rent decline, with asking and effective rents falling 7.3% and 7.2%, respectively.
New construction could exacerbate an economic downturn
How should investors interpret these results? With some worry, unfortunately. Recession probabilities for 2023 remain high — higher than 2022, given recent liquidity events that might affect how credit is extended.
If the U.S. economy tips into a recession, multifamily markets will see a decline in demand. Unfortunately for LA, Moody’s is also expecting a large slug of new supply to come online this year: close to 14,000 units, the highest figure since 1990. That duo of slowing demand and a large amount of new construction is never a good combination for rental performance metrics.
Keep an eye on neighborhood oversupply
The LA apartment sector’s prospects remain healthy over the medium- to long-term. The near-term may prove volatile, but the discussion needs to be nuanced. Watch out for specific submarkets where construction might be high, as those likely carry the greatest risk for the next 12 to 18 months.
By the editorial team at Story by J.P. Morgan
What’s the multifamily outlook in other U.S. metro markets? Watch our mid-2023 analyses for more cities across the country.
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