LA's Apartment Market Appears on the Mend ... Except Where It's Not

 Contradictory signals are exhibited in the apartment sector's recent performance across many metros throughout the country. That mix of good news and bad news is especially pronounced in metro Los Angeles. Key among the factors that make the gigantic Los Angeles apartment sector so complicated is that the metro isn't in any way, shape or form a single market. Instead, it's a multitude of individual markets drastically different in terms of factors such as product characteristics, property ownership profile, and resident traits.

Let's break down some of those differences across select neighborhoods to get a feel on the variety of influences seen on LA's overall stats.

The Hollywood submarket provides as a good example of the patterns taking shape in the more urbanized areas of metro Los Angeles. After Hollywood's apartment occupancy rate got as low as 92.4 percent in late 2008, this submarket managed to post substantial demand throughout 2009, recapturing some of the renters who previously had left conventional apartments for alternative options, namely the area's meaningful stock of individually-owned condos offered for lease. By the end of 2009, occupancy was back up to 95.1 percent, certainly still below the long-term norm but dramatically improved from the year-earlier rate.

Following 2009's occupancy progress, MPF Research anticipates that Hollywood's occupancy rate will hit a plateau in 2010. One factor expected to inhibit further immediate recovery in occupancy is that Hollywood will add a comparatively significant block of new supply during the coming few months. But also important is that Hollywood probably won't be able to pull many more renters out of shadow market alternatives unless further sizable rent cuts occur, and effective pricing in the neighborhood began to exhibit some stability (at least for the moment) during the final quarter of 2009.

Near-term price positioning actually is a real wild card for Hollywood and other highly urbanized submarkets in Los Angeles, partly because so much of the stock consists of small properties owned and sometimes managed by the mom-and-pop set. (Looking beyond one mega-community of more than 4,200 units, nearly 40 percent of the remaining product surveyed in Hollywood during 4th quarter was in properties with fewer than 100 units.) Operational behavior of these smaller players can be difficult to predict because sensitivity to cash flow sometimes is far greater than is seen at communities with institutional ownership. The pattern seen thus far in the cycle suggests that small property owners are very intolerant of vacancy and will lower rents to whatever level is necessary to keep occupancy at a fairly high threshold. The occupancy of about 92 percent seen a year ago clearly was too low to be acceptable within this group, but it's not entirely clear whether or not the rate has to get all the way back to the historical norm of around 97 percent or better before the rent cuts will completely come to a halt in this product segment of smaller communities. MPF Research is assuming that the "magic number" for the group is occupancy of 95 to 96 percent.

The product and ownership characteristics seen in Hollywood register to a significant degree in submarkets such as Intown Los Angeles, West LA and the Tri Cities (Burbank, Glendale and Pasadena). In turn, those submarkets are exhibiting performances that follow the pattern posted in Hollywood.

The Santa Clarita Valley stands as the prototype of the other extreme in metro Los Angeles' apartment market mix. Of the product there that MPF Research surveyed during 4th quarter, only 1 percent of the stock was in smaller properties of fewer than 100 units. And the owner/manager configuration in the area consists almost entirely of big-name firms active at least all along the West Coast and often with a sizable national presence.

Santa Clarita Valley occupancy at the end of 2009 was just 91.5 percent, almost 4 points lower than in Hollywood. Furthermore, whereas Hollywood's occupancy improved quite a bit over the past year, the Santa Clarita Valley's late 2009 rate still wasn't much better than this cycle's low point. Hurting the occupancy performance in the area, Santa Clarita Valley apartments face lots of competition from for-lease single-family homes that are being offered at rents fairly comparable to the prices for the local apartment stock.

The Santa Clarita Valley and somewhat similar neighborhoods like the San Gabriel Valley and the Antelope Valley are the locales where MPF Research anticipates notable upward momentum for apartment occupancy during 2010. While this outlook partly reflects that no further apartment product is on the way in these very suburban submarkets, the real story should be acceleration of the burn-off of single-family rentals that have been capturing a sizable share of total housing demand. After single-family home sales in Southern California first began to register the return of significant momentum in the Inland Empire during late 2008 and early 2009, activity now is spreading to metro LA's submarkets with the most affordable home prices.

While 2010 occupancy in the Santa Clarita Valley and somewhat comparable locales probably won't quite be strong enough to stimulate any rent growth over the course of the year, expected occupancy improvements do translate to some actual upturn in total revenues.

There are metro LA neighborhoods where characteristics fall in between the product extremes found in Hollywood and the Santa Clarita Valley. For example, the South Bay Cities area, Long Beach and the San Fernando Valley are pretty diverse submarkets. And, as might be expected, their overall performances of late have tended to fall right in the middle between the opposite ends demonstrated by Hollywood and the Santa Clarita Valley. In those areas, then, near-term expectations tend to resemble the outlook for metro Los Angeles as a whole.

Market Dynamics is an examination of key influences on the apartment industry by MPF Research, the industry's most trusted source of apartment market intelligence. To receive the latest Market Dynamics newsletter in your e-mail inbox, please click here to subscribe.