The Los Angeles apartment market has already returned to pre-pandemic activity, according to the latest research from Marcus & Millichap. Apartment leasing is at a 15-year high, illustrating the strong renter demand. Demand has been so healthy that vacancy has fallen to 4% and rents are up 3% for the year.

Job growth is behind the market’s swift recovery. In the second quarter, 89,000 jobs were added to the employment market. At the same time, 9,700 units were leased and the county added 37,000 new households to Los Angeles County. Marcus & Millichap expects equally strong job growth in the second half of the year, ultimately predicting that 250,000 jobs will be added to the market this year.

A new supply demand imbalance is also driving the low vacancy and increasing rents. The dynamic is the most severe in the luxury segment, where class-A vacancy rates have decreased in all of the major sectors of the Los Angeles market. Although there will be 10,500 new apartment deliveries this year, only Greater Downtown Los Angeles, which includes Mid-Wilshire and Hollywood, is reporting an increase in supply. The Westside Cities, San Fernando Valley and South Bay-Long Beach, however, will see a 10% to 35% decrease in new home deliveries.

The dynamic of increasing demand and stagnant or decreasing new construction will continue to drive strong fundamentals for the apartment market through the end of the year. Marcus & Millichap predicts that vacancy will fall 60 basis points this year, and effective rents will increase 5.5%. The rent growth will offset the 4.8% decrease in rents last year, and will achieve a new record of $2,340 per month average rents in Los Angeles.

Despite the strong fundamentals, investors have not yet returned to the market. Overall deal activity is down 25% for the first half of the year. The decrease in activity was most notable in the $1 million to $10 million-investment segment, which is largely made up of class-B and class-C properties. During this time, property values in the market increased 4% to $298,000 per unit; however, the median area cap rate remained at 4.4%.

Back rent is one factor that could be stopping apartment investment. A recent study from UCLA Lewis Center for Regional Policy Studies and the Lusk Center for Real Estate found that Los Angeles County has $3 billion in total rent debt, and Los Angeles city has about $1.5 million in unpaid rent from the pandemic. Among those with rent debt, the average tenant owes $2,800 in unpaid rent. The share of renters with rent debt worsened as the pandemic wore on.