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The Real Deal Los Angeles

This is why DTLA has the highest resi vacancy rate in LA County

“Lenders love multifamily. What they’re cautious about is DTLA.”

Steve Basham from CoStar (credit: Steve Basham)

Do enough wealthy people want to live in Downtown Los Angeles to fill 7,000 units? Investors are growing increasingly skeptical.

Roughly 3,000 luxury apartment units are under construction in Downtown Los Angeles in 2017, and 4,000 more are slated to be built next year. Concerns that demand won’t meet this influx of supply are on the rise — along with Downtown’s residential vacancy rate, which rose 0.5 percent over the past year, despite landlords’ attempts to ramp up concessions, according to a second quarter report from CoStar Group.

At 11 percent, DTLA has the highest vacancy rate in Los Angeles County — nearly twice as high as Hollywood, which has the second highest rate, at 5.8 percent.

The sheer volume of multifamily construction in DTLA — paired with the growing vacancy rate — has made lenders more cautious about offering loans to developers. Even for those who nab construction loans, a lower loan-to-value ratio has left developers with financing gaps, said an analyst who did not wish to be named.

“Lenders love multifamily,” the analyst said. “What they’re cautious about is DTLA.”

Rent growth slows, concessions rise

Meanwhile, landlords of existing properties are having a difficult time pushing rent, CoStar’s Steve Basham told The Real Deal in an interview at Bisnow’s Multifamily event last week at the Millennium Biltmore Hotel.

Rents in Greater L.A. rose 3.5 percent from the second quarter of 2016 to the same period this year, as the housing crisis in the region worsened. Rent growth in DTLA has been minimal by comparison. The average rent for a one-bedroom unit Downtown is approximately $2,550 a month, a 1.5 percent increase since the second quarter of 2016.

When it comes to rent growth, DTLA was second to last on the list of submarkets that CoStar tracks in L.A. — it came in at No. 35 out of 36.

“The projects that are delivering right now are doing it in an atmosphere in such an intense competition that it is going to be very difficult for landlords to push rent at all,” Basham said. “The pipeline is still pretty full in the next few years, and that short term pain will probably continue to be the case.”

Concessions, unusual in other parts of L.A., were seen as a negotiating tool in the face of a potential oversupply of luxury apartments in DTLA last year. Now, at least a month of free rent is seen as standard at Downtown projects, Basham said. Projects delivered in 2017 have offered an average of four to six weeks of free rent, often with additional incentives such as six months of free parking.

Wanted: wealthy renters
All the new construction in Downtown targets the top 10 to 15 percent of the renter pool, meaning roughly only 1.5 to 2 million of the Los Angeles residents are able to afford to live in these apartments, Basham said. However, many of these potential affluent renters prefer to own a home or live in pricey Westside areas like Santa Monica, he said.

Despite the woes of landlords and investors, DTLA is not necessarily a bad bet — if you’re playing a long game. Investment in DTLA may reap rewards in the next 10 or 20 years, Basham said. He suggested that population growth and the reinvention of Downtown’s culture will ultimately alter Angelenos’ views towards living in DTLA.

“You get 500,000 people who commute into DTLA and leave, so the potential renters are there,” Basham said. “It’s just convincing them that it is a good place to live and stay down here.”