Los Angeles Rents Decline

According to the annual USC Casden Forecast, rents fell 4% in the Los Angeles area in 2008. On the brighter side, the report indicates that rents are not in a freefall and should stabilize in 2010. Highlights of the report:

The average rent in Los Angeles County fell almost 4% in 2008 as apartment occupancy rates dropped and new units came online. The decline should continue this year as more renters lose their jobs.

"In L.A. County alone, 41,000 people moved out of apartments last year compared to the 29,000 people who moved in during the last five years," said forecast director Delores Conway.

To keep their units occupied, some landlords are lowering rents or offering concessions for signing a lease, such as a month of free rent or a reduced deposit, she said.

Rents should level out in 2010 as the economy recovers, the report said. The average one-bedroom apartment in Los Angeles rented for $1,397 a month at the end of last year.

The Westside remains the priciest, while Pasadena and Burbank are stable with little change in occupancy or rents. Rents in Hollywood and central neighborhoods such as downtown Los Angeles are being weakened by new condominiums that are being leased rather than occupied by owners. [Los Angeles Times]

The cause of the rent decreases are twofold – increased supply and decreased demand.

Unsold condominiums in key markets (Hollywood, Downtown, Long Beach) have been converted to rental property, increasing supply of rental units.

High unemployment and financial hardship have caused renters to move in with friends or family (or move out of the city) rather than renting, decreasing demand.

Several forces should prevent rents from spiraling downward – and in fact should cause (excessive) rent momentum going forward:

1. Few apartment buildings are under construction. Once the condos-turned-rentals are absorbed, there will be virtually no new supply of apartment units.
2. The glut of REOs and short sales – which has served as a “ghost” rental market – will dry up, decreasing rental supply.
3. Fewer renters will make the transition to becoming homeowners as loan underwriting guidelines are tightened.

It may be a few years off, but Los Angeles rents have the potential to climb precipitously in the not-too-distant-future. For now, financially-strapped renters can take advantage of the cooling rental market and lock in favorable terms.