L.A. Class-B and C Apartments Could See Rent Increases

It is still too early to tell how severe the oncoming recession will be or how long it will last. However, there is a plausible scenario that class-B and class-C housing in Los Angeles could see substantially higher demand as a result of the downturn, leading to rent gains in that market segment. Apartment List released a survey of March rents, showing flat rents consistent with long-term trends in Los Angles. The data was still to early to show the impacts of the virus, but the forecast might not be total doom.

“It seems highly possible that when moving activity returns to more normal levels, an uptick in downgrade moves could result in even tighter competition for rental units at the middle and lower ends of the market, while luxury vacancies get harder to fill. In this scenario, it wouldn’t be unreasonable to see rents fall for class-A properties, while class-B and C actually see accelerated rent growth.,” Christopher Salviati, housing economist at Apartment List, tells GlobeSt.com.

The demand shift to this market segment is largely due to Los Angeles’ exposure to job loss resulting from closures and social distancing restrictions. “A recession of some magnitude seems largely inevitable at this point, but it’s exact severity and duration, as well as the specific local impact to the L.A. area, are all a bit tougher to speculate on,” says Salviati. “That said, in a report we released last week, we found that the L.A. metro has the eighth highest share of workers facing immediate economic risk from what we’ve deemed the quarantine economy.”

While rents were flat in Los Angeles last month, the nation continued to see rent growth. In fact, national rent growth in March outpaced 2019 growth, making predicting the impact even more challenging. “Year-over-year rent growth at the national level currently stands at 1.9%, pacing ahead of last year’s rate of 1.2%. Note that the 1.2% rate from last year was the slowest rate of growth that we’ve seen over the past five years,” says Salviati. Meanwhile, the current 1.9% rate is in line with trends from 2017 and 2018, and is actually slightly lower than the overall rate of general inflation.”

While the year-over-year growth isn’t much of an indication of market strength, according to Salviati, it does show that—prior to the pandemic—apartment rents nationally continued to grow. “The fact that we’re outpacing last year doesn’t mean that the current rate is particularly high, and overall, rents seem to be growing at a fairly healthy pace,” he says. “Last year, many markets saw record numbers of new units hitting the markets, which I think was driving the lower level of rent growth.”