Los Angeles County is a trapezoidal expanse of arid land stretching from an ocean of salt water to an ocean of sand and rock, punctuated by unscalable mountain peaks and towering canopies of ancient woods. Water has always been precious there, and the land is becoming just as scarce. It’s absurd that more than 10 million people live in Los Angeles County, but the weather is just so nice!

As big as this county is — and it’s bigger than the two smallest states combined — only a portion of it has places where people actually want to live, and those communities are rapidly getting built out. (In case you’re wondering, the combined population of Rhode Island and Delaware is 2 million.)

“Buying a home has become out-of-reach for three-quarters of LA County residents,” according to YardiMatrix, citing the California Association of Realtors. “As home values climb faster than wages, many would-be homeowners turn into long-term renters.”

So that leaves builders struggling to keep up with demand. They were winning the race for a couple of years, and the rental market did soften for a while. But it might be heating up again, as the 10,000-unit-per-year construction sprint proved not only sustainable but actually insufficient. According to Marcus & Millichap, 2019 deliveries could beat 2018’s by over 50%.

‘Landlord’s Market’

The winter 2019 Yardi report points to what it calls a “landlord’s market” triggered by the county’s job growth causing new residents to flood in. “Despite a surge in rental construction, the average occupancy rate has remained high, at 96.6% as of October,” the study says.

If that’s true, it’s bound to get even tighter from here. When compared to the U.S. economy as a whole, Los Angeles County is actually something of a laggard. In good times or bad, any region would brag about having 1.4% more jobs than it had a year ago, but LA’s figure stands far below the national average of 2.0%. Similarly, a 4.8% unemployment rate is not in the least unhealthy, but the American norm comes in at 3.7%. So it would appear that the Angeleno job market still has room to grow and, thus, so do Angeleno rents.

Even though L.A. job growth is slower than the U.S. average, the rents are significantly higher: $2,178 versus $1,419. The county is so choked with potential tenants that Yardi subdivides them into two classes: “lifestyle” renters as opposed to “renters-by-necessity”. The former, comprised mainly of retirees, have the wherewithal to buy a house but choose not to. The rest — young professionals, blue-collar workers, the military — don’t have much of a choice financially.

These correspond, more or less, to the distinction in housing stock between Class A and Classes B and C. It’s telling, then, that the deeper you go into the alphabet, the more rapidly rents are rising. This is reflected in acquisition yields, which start at 4% for Class A and rise to 6% for Class C.

90210

Los Angeles has famously been called “72 suburbs in search of a city.” That barb has stung Angelenos for almost a century now, but it only hurts because it’s true. Further, each of these communities has got its own housing market dynamics. Average rents range from Lancaster’s $1,294 to Century City’s $6,611.

We won’t go all the way through the list, but some high points jump out. First, L.A. seems to have found the city it’s been searching for. More than 5,000 units are under construction in Downtown Los Angeles, making it the hub for residential development in the area. It’s followed by East Hollywood and Hyde Park, then the communities along its 70 miles of oceanfront.

Much of that oceanfront development is toward the southern end of the county. “Expansions by defense and aerospace-related firms enhance the appeal of cities south of LAX Airport,” Marcus & Millichap report. “To the north of the airport, smaller Class C assets trading at high-2 to low-3 percent initial yields steer deal flow.”

Such neighborhoods as Hyde Park and Ladera are seeing some of the highest rent increases, approaching 10% in both of those submarkets — stretching the definition of what passes for affordable living in L.A. Canoga Park, tucked away in the San Fernando Valley to the north, saw more than $500 million in transaction value in 2018, more than any other L.A. County community outside Downtown L.A.

Beyond the Valley sits Santa Clarita, a community of 200,000 that really has very little to do with the mega-city to the south. This edge city has its own identity and its own economy, which includes $434 million in 2018 real estate transaction value.

Children of the early 1990s might be wondering about the nation’s most famous ZIP code: Beverly Hills 90210. Turns out, almost half of Beverly Hills rents — funny how we never saw an apartment building on the show. Along with neighboring Westwood and Bel Air, it continues to see higher rents every year.

The Other Half

All the neighborhoods mentioned so far have one thing in common: They’re all on the same side of a very real line that bisects the county into a desirable western section and a struggling eastern section. The line starts at the northern county limit, following Interstate 5 around the eastern edge of Downtown L.A., then following Interstate 110 to the southern county limit.

But just because Hollywood’s rich and famous ignore that half of the county doesn’t mean multifamily housing developers do — or that they’re not finding investors to back these plays. Certainly far more money is being poured into the luxury markets west of the interstates — perhaps too much, considering how occupancy rates are declining — but there are still plenty of opportunities in places that few others are focused on.

In addition to opportunities in the aforementioned San Fernando Valley, “buyers seeking upside-producing opportunities in areas of tight vacancy eye listings in … cities north of Route 60,” according to a Marcus & Millichap report. “Here, the 1960s- to 1980s-built Class C properties provide investors with low-3 to mid-4 percent first-year yields.”

Route 60 starts in the economically disadvantaged neighborhoods of East Los Angeles and runs east into San Bernardino County. These communities include Monterey Park, West Covina and the university town of Pasadena.

But east, west, north or south, there is more nuance to Los Angeles County than there is to most states. From the beachfront to the mountains to the forests beyond, this is the most populous non-state municipality in America, and it defies easy pigeonholing. It could easily spin off a Santa Clarita County, a Palmdale-Lancaster County and a Long Beach County, each of which would be a major population center. So even in the worst of times, there’s bound to be some interesting investment case in this multifamily real estate market. And these are anything but the worst of times.

Los Angeles at a Glance

• Average monthly rent: $2,350/month, up 4.0% year-over-year
• Vacancy rate: 3.9% and rising
• New units (projection): 14,800 in 2019, compared with 9,700 in 2018

Sources: YardiMatrix, Marcus & Millichap