The extreme multifamily rent growth in Los Angeles is beginning to slow, and while rent growth is still substantial, we couldn't help but wonder how the deceleration of growth is impacting vacancy rates. It stands to reason—especially considering that L.A. has been pegged as a city with a severe housing shortage—that vacancy rates would decline in response. We asked Richard Green, director of the USC Luck Center, how the slowed rental rate growth is expected to impact vacancy rates, and he pondered the idea that we may be hitting a supply equilibrium.

“It is like we are getting an equilibrium, which is to say that neither vacancy rates nor rents will move that much,” Green tells GlobeSt.com. “It confuses me a little bit because we are still not building all that much, especially relative to where we expect demand to be. It could be that there is not as much demand as we thought there was going to be.”

Population growth—which had been expected to grow rapidly over the next decade—is actually slowing. Green says that since the last census, Los Angeles County has grown by approximately 50,000 residents, which would translate to a need for 20,000 new housing units each year. We are currently building 25,000 new housing units per year. “It could be that population growth is slowing enough—and rents may be a reason for that—that we are at a point where we building enough product as there is demand for new product,” he adds. “That hasn't been true for a long time. We went from 2008 to 2014 not building much of anything, and now we are building 25,000 units per year.”

While reaching a housing equilibrium would ideally be good news, there is still a housing affordability crisis. One reason may be that Los Angeles is gaining high-income residents and losing low-income residents. “This is also a chicken and an egg situation because there are people that are being discouraged from coming here because the rent is so expensive,” says Green, explaining that some would-be transplants have been detoured from moving here because of the tremendously high housing prices and some lower income Los Angeles residents have moved to less expensive markets.

If Los Angeles does have an adequate housing stock for high-income residents, there is still a shortage of workforce housing units. The solution, however, isn't as simple as building more workforce housing units. High land and construction costs make it nearly impossible to build any units for less than $400,000. “To build anything in Los Angeles, before you even bought the land, you are looking at $100,000 a piece in construction costs,” says Green. “Then, the land underneath the property is another $100,000 per unit. So, you immediately turn a $200,000 unit into a $400,000 unit. It is very difficult to build anything for less than $400,000 if you are looking for a 5% return, which is not an outsized return.”

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Are We Actually Reaching a Housing Equilibrium?

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