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For much of the recovery, investors enjoyed strong gains from solid rent growth across the higher-end apartment market. In Los Angeles, Class A apartment rents climbed 41.4% since 2010. As the cycle matured, the market became saturated with Class A apartments and yields on expensive dwellings were squeezed to historic lows, slowing down the pace of year-over-year rent growth to a tepid 2.5% in Q3 2018 (Figure 1). Smaller gains in the high-end space, coupled with a lack of affordable housing, shifted investor attention to older, less expensive Class B and Class C apartments* (“workforce housing”) where rent growth surged in 2015 and has been outperforming Class A product since. In Q3 2018, workforce housing rents increased 3.5% year over year.
Fig. 1: Luxury vs. Workforce Housing Rent Growth in Los Angeles, Year Over Year (%)
Source: CBRE Research, Q4 2018. |
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Multifamily workforce housing comprises mostly older (pre-2000s product) and mostly suburban garden-style communities. Renters in these communities are often “renters by necessity” vs. “renters by choice.” Limited wage growth during this economic cycle has fed more renters into workforce housing, which has an inventory of about 928,000 units** Los Angeles.
As value-add investment and redevelopment activity has increased rents in this sector, investors have stepped up transaction volume. Investors spent $1.5 billion on workforce housing in Los Angeles in the third quarter of this year. Year to date (through Q3), that figure totaled almost $4.0 billion, a 43% increase from the same time one year ago (Figure 2).
Fig. 2: Investment in Los Angeles Garden Properties (pre-2003, $ Billions)
Source: CBRE Research, Q4 2018. |
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NCREIF returns for garden multifamily, a key component of workforce housing, were considerably higher than the all multifamily average. The Q3 one-year returns for garden assets in Los Angeles averaged 10.5%, nearly double the overall multifamily return of 6.6% (Figure 3). Workforce housing has been outperforming the broader multifamily market since 2015 and should continue
that trend for the near term since this sector’s superior performance makes it a compelling argument for investment.
Fig. 3: NCREIF Returns – Los Angeles Multifamily Total vs. Garden-Style Apartments (%)
Source: CBRE Research, Q4 2018.
*Some Class B properties would not qualify, but using classes is a frequent and adequate approach.
**Class B and C, built before 2001. |
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