L.A. Real Estate Market Report - Oct. 2022

Posted by: TheGuarantors on November 21, 2022

The multi-family housing rental market in Los Angeles has remained strong through 2022 so far, with both rent and occupancy rates high. However, increased renter default risk may be on the horizon. Moving forward, owners and operators should focus on adjusting to high rents and occupancy while also reducing their operating costs and mitigating the risk posed by potential defaults. It will be critical for owners and operators to stay responsive to market changes over the rest of the year and equip themselves with the tools that allow them to do so.

Owners and operators retain significant pricing power so far in 2022. The median rent as of October in Los Angeles of $3,185 represents a 16% year-over-year increase. Though month-over-month increases in rent have slowed, every month in 2022 so far has seen double-digit year-over-year growth in rent. If rents are indeed stabilizing, they’ll do so at historically high levels. Though vacancy rates nonetheless remain low, the Q3 2022 vacancy rate of 5.1% represents a slight increase from earlier in the year, suggesting that while demand remains high, renters may have started responding to high rents. Here at TheGuarantors, we’ve seen this demand translate into increased levels of leasing activity, with a 30%+ increase year-over-year in transactions over the course of 2022 so far.

Some of this can be attributed to a less accessible home-buying landscape. Average 30-year fixed rate mortgage interest rates have increased each month of 2022 with the exception of August, and the average rate in October of 6.90% is a 3+ percentage point increase over that of the same time in 2021. Meanwhile, home prices have not yet declined significantly in response to rate increases. The median home sale price in Los Angeles during October was 1% higher year-over-year, and Freddie Mac’s seasonally adjusted home price index was higher in September than during the same month in 2021. Even if home prices do begin to soften, high mortgage rates that may climb even higher are likely to move some would-be home buyers into the rental market, buttressing demand.

A number of standout new developments are poised to boost inventory. Related Companies celebrated the opening of The Grand by Gehry in July, a 436-unit property in Downtown Los Angeles and part of the Grand Avenue redevelopment project. Chandler Partners plans to complete The Elinor, a 202-unit property in Los Feliz, during the third quarter of this year. These are among the more than 600 properties in lease-up in Los Angeles in 2022, an increase from 2021. Construction activity may also be picking up, with new residential construction permits issued in Los Angeles so far in 2022 up slightly compared to last year.

What this means for renters and associated rent-roll risk in L.A.

Though demand for rental housing remains quite high, the risk of renter default may increase over the coming months as consumer inflation coupled with stable yet high rents strain residents’ finances. Angelenos are seeing their spending power challenged by recent inflation. The Consumer Price Index has increased in each month of 2022 with the exception of July, with September reaching a 7.8% increase year over year. Given the steep rent hikes over the last year, it’s little surprise that keeping up with rental payments is consuming a bigger portion of families’ income. The median rent in Los Angeles in October represented a whopping 42% of the median family’s income and an increase compared to the same period last year. Though unemployment remains low at only a projected 4.5% in September, many Angelenos are already in a precarious financial position that could turn dire should the job market deteriorate. Here at TheGuarantors, we’re seeing landlords take action to get ahead of this increased risk by flexibly and seamlessly expanding the rent coverage they get from our Lease Guarantee.

Legal changes in Los Angeles and in California more broadly are having mixed effects that may come to a head in early 2023. In January, the Los Angeles County Board of Supervisors voted to extend the City’s Covid-19 Tenant Protections Resolution through the end of the year. As a result, owners and operators will not be able to raise rent for any units subject to the City’s Rent Stabilization Ordinance—the majority of units in L.A.—until 2023. However, a federal judge recently issued a preliminary injunction against enforcement of eviction protections within the resolution, effective December 1. Owners and operators should stay tuned to see how the County may adjust the eviction moratorium over the next month. SB 9, or the “California HOME Act,” is now in effect throughout California, allowing homeowners to create additional housing units on the same lot by either building additional homes or by dividing. Though the law will likely increase the supply of rental housing units, it remains to be seen how it will impact the market overall. If the law incentivizes developers to buy up single-family homes in order to split them, as some predict it will, increased competition in the homebuying market could move more Angelenos to rent.

How L.A.-based multi-family owners and operators can react

What does this all mean? L.A. owners and operators should respond to market conditions while demand remains high by first and foremost, listing apartments at sustainable prices, targeted to what a renter can reasonably pay. However, with a recession looming, it’s difficult to accurately predict the financial future of all prospective renters. Responsibly leveraging products and services can help owners and operators maintain a high leasing velocity and protect themselves against rent default in this competitive market. TheGuarantors’ Lease Guarantee and Security Deposit Replacement products reduce the up-front expense renters must bear to move in, and can accelerate the process of qualifying renters for the homes they choose.

If you’re interested in reducing your time and expenses around lease guarantees and security deposits, we’d love to help. Contact us.