Demand Meets Record Housing Deliveries in DTLA

The strong demand in Downtown Los Angeles is keeping pace with new supply. Last year, there were a record number of apartment deliveries in Downtown Los Angeles, according to the most recent report from the DCBID, with a total of 3,295 new units coming to market. That is a 16% increase over the deliveries in 2017. In the fourth quarter alone, 629 new units came to market.

These new deliveries pushed the market vacancy rate up 4%, however, developers report record absorption rates ahead of schedule. “In the fourth quarter of 2017, there was a momentary spike in the vacancy rate because of the rush of product that hit the market,” Nick Griffin, executive director at the DCBID, tells GlobeSt.com. “What we are seeing again is that the product is working its way through the system faster than the developer’s projections. The market seems well able to absorb an increased amount of inventory. Any time that there is a record-breaking amount of inventory on the market and it gets absorbed, it is yet more proof that the market has the capacity for growth and there is not a constrained demand.”

Despite the increase in vacancy, rental rates continued to climb. In the fourth quarter, rates increased 1.3% to $3.11 per square foot. As a result of both the demand and rental rate growth, new construction projects are breaking ground, as developers see a justification for more supply. “There has already been enough in the pipeline that I don’t think the pipeline is expanding, but projects that are teed-up in the pipeline are moving forward,” says Griffin. “We are not seeing projects falling out of the pipeline or even stalling. It seems like when product is delivered and absorbed, the next tranche of projects moves forward.” Looking out three years, he doesn’t see a significant pause in new construction activity.

While rental units account for the majority of the housing activity in Downtown Los Angeles, the condo market has also proved strong. At the end of the fourth quarter, condo prices were $697 per square foot, flat year-over-year, and Griffin says that recent mid-market projects have sold out, including the first phase of Perla. He is hoping to see more projects of that style come to the market. “There hasn’t been as much condo construction as we would like,” he says. “The ones that we did see have sold out, and that is a good indicator. We are strong believers in the value of homeownership in the Downtown Los Angeles area. In our promotional materials, we include both rental and for-sale properties.” With limited projects in the market condo sales fell year-over-year, with on 76 trades in 4Q18 compared to 99 in 4Q17.

Despite the demand, rental continues to dominate the market. That is likely because it is considered a higher-risk investment model. Griffin says, “Most of the development has been focused on rental, and a lot of that has to do with the financing.” There are currently 6,388 proposed condo units in the DTLA construction pipeline.