DTLA Multifamily Occupancy Falls Nearly 10%

In the first quarter, the multifamily occupancy rate in Downtown Los Angeles fell significantly. According to the latest report from DCBID, the occupancy rate in the first quarter fell 9.2% to 84.7%. The decrease was the result of new apartment deliveries in the market, and therefore is likely temporary. The demand for rental units continues to exceed the supply in the market, and new apartment buildings are exceeding lease-up goals.

“This is totally a temporary spike,” Nick Griffin, executive director at the DCBID, tells GlobeSt.com. “There is a huge amount of new inventory all at one time, and this has happened in the past when new product comes to market. We had 2,300 new units deliver, and if you look at the absorption rate, the leasing offices feel like they are doing just fine. It takes a certain amount of time to absorb those units.”

The Onni Group’s 516-unit project at 825 South Hill is a perfect example. The property opened earlier this year and is already half leased. “They are way ahead of their projections, and that is a big building with not inexpensive units,” says Griffin. “The properties are very confident about the level of demand that the projects are seeing.”

The demand is underscored by strong rental rate growth. While the occupancy rate fell in the first quarter, rental rates climbed .6% to $3.17 per unit and concessions have been constrained. “You are not seeing a big spike in concessions,” says Griffin. “There might be a minor increase in concessions around the edges, but that is internal competition in the market joking for position. We are not seeing a drop in price or a significant increase in concessions.”

On the for-sale side of the market, condo prices increased to $704 per square foot in the first quarter, but the limited availability of condo product makes trends harder to track. “Our condo market isn’t particularly large,” says Griffin. “There is not much in the way of new product, so it isn’t a broad market. That continues to be primarily driven by the financing. There is enough institutional capital that is willing to buy completed projects at a high enough price that the delta between what a developer can get for a fully leased project versus what they would get if they sold the units individually isn’t very much. Then, it only makes sense to build a rental complex.”

In addition to less attractive returns, condos are also riskier investments than rental product, especially with such strong rental demand. “There is a huge demand for rental property, and that is much less risk that selling each of the condo units individually. That is still the main dynamic,” says Griffin. However, that could be changing. Griffin has his eye on the Pearla condo development, which he calls a more moderately priced option for for-sale housing. If successful, it could be a catalyst for more condo development.