Apartment Market Heads for Mild Softening

One reason for the Marcus & Millichap outlook is that, despite the continuing decline in home prices, demand for apartments keeps rising because buying a home in Los Angeles is still too expensive for a large part of the population. Nonetheless, the company's study shows that a weakening job base has produced "a notable uptick in vacancy over the past year" in 26 of the Los Angeles Metropolitan area's 37 class A submarkets.

Despite these vacancy upticks, "Healthy demand and solid rent growth will fuel investor interest in the quarters ahead," Marcus & Millichap forecasts, although it expects that "deal flow will remain measured as tightened lending criteria continue to shrink the pool of active buyers." Sales have already slowed by 37% on a year-over-year basis, partly from a steep drop-off in 1031-exchange activity and "a more diminished role from leverage-dependent investors," the report says. Apartment properties have traded at cap rates averaging in the mid- to high-5% spectrum over the past year and are expected to stay in that range through the remainder of 2008.

Another result of the economic uncertainty is that apartment owners will ask for smaller rent increases, with asking rents expected to rise 4.4% to $1,489 by year-end 2008, while effective rents will gain 4.3% to $1,440. Novato, CA-based RealFacts already has Los Angeles area rents pegged at an average of $1,661, but RealFacts tracks a different property base than the inventory tracked by Marcus & Millichap, with RealFacts focusing more on institutional-grade assets.

The RealFacts figures rank Los Angeles as the fifth-highest rental market in the country. Its $1,661 average rent compares with an average of $2,272 in the Greater New York area, the highest in the nation, followed by Bridgeport-Stamford at $2,179, Greater Boston at 1,905 and San Jose, CA at $1,708.