LOS ANGELES—The multifamily market has hit new records in both 2015 and 2016, and Curtis Palmer, executive managing director at Newmark Grubb Knight Frank, doesn't expect that to change in 2017. According to Palmer, we are headed for a very strong year with continued rent growth—even if that growth starts to slow—and a strong investor appetite. Rents in Los Angeles have grown so significantly, it is hard to imagine that the market can handle even more rent growth. However, Palmer says that residents can afford upwards of $4,000 to $5,000 per month for rent, but don't have enough equity to purchase a home or condo, which is helping to accommodate higher rental rates. Palmer sat down with us for an exclusive interview to discuss the rent growth in Los Angeles and his expectation for 2017.

GlobeSt.com: What is driving the significant rent growth in Los Angeles?

Curtis Palmer: Strong job growth created by the synergies between the technology and entertainment sectors. Technology is hungry for content, which they can efficiently distribute through new innovations, and entertainment is constantly looking for new methodologies to distribute their content. Southern California has been home to movies and television for multiple generations, and today universities in Southern California including USC, UCLA and Cal Tech produce more engineers on an annual basis than Northern California schools. There is more of a creative influence today in Southern California's technology growth as evidence by Activision Blizzard creating its own production company to make movies out of their robust computer games catalog. New startups have also bolstered growth, most noticeably Snapchat who have been buying up real estate throughout Santa Monica and Venice.

GlobeSt.com: Is there concern that this rent growth is leading to an affordability issue?

Palmer: Not yet, jobs in the technology and entertainment space are typically high paying enabling millennials and life style renters to comfortably afford rents in LA. Also, it should be noted that while rent growth has been fairly strong over the last several years we are still far cheaper than San Francisco and much of the South Bay in Northern California.

GlobeSt.com: Can rents continue to increase at this rate, or are we heading toward a plateau?

Palmer: The highest rents in the LA basin are in Santa Monica at approximately $6.00 per square foot, many of the other submarkets currently top out between $4.00-$5.00 which is still a discount to Northern California. Median incomes for millennials in the tech and entertainment is well above $100,000 annually and growing which bodes well for continuing rent growth. Additionally, the for sale housing market continues to be out of reach for all but the top earners with sales prices between $1,000 and $2,000 per square foot being normalized in most west side neighborhoods as well as the Hollywood Hills, Beverly Hills and West Hollywood.

GlobeSt.com: What types of multifamily properties are producing the best returns for investors, and why?

Palmer: We believe the best opportunities for investors today is in the acquisition of apartment communities in urban infill locations with very strong walk scores that were built between 2006-2010. Since emerging from the great recession in 2012 new apartment construction has been characterized by highly amenitized communities with interior finish levels comparable to high end condominiums. As an example this may include quartz counter tops, undermount sinks, stainless steel appliances, front loading washer dryers, Sonos surround sound built in systems, infinity pools to name but a few. Deliveries in the 2006-10 window typically have excellent bones, are well located but lack the modern touches, which I just highlighted. Therefore, rents in the 6-10 year old communities typically lags the new competition. By identifying this vintage community that has no functional obsolescence investors can boost rents to the higher end of the market through a stylized infusion of capital.

GlobeSt.com: Are these rental increases the major driver of multifamily investment in Los Angeles, or are there other strong fundamentals driving the investment market?

Palmer: For over a generation LA has been beset by a housing shortage, which continues today. Recent ballot measure including JJJ make it more difficult to develop new communities such that demand for units typically is much greater than supply making LA a desirable destination for investment capital. Also, we are the second largest city in the country and have a major affordability issue in the for sale market, which is one of if not the greatest driving force in demand for rental housing.

GlobeSt.com: What is your outlook for 2017?

Instant Insights /

Is There an End to Multifamily Rent Growth?

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