What You Need to Know to Stay Ahead in Los Angeles Multifamily
By Marc Frenkiel, Appfolio
What’s happening in the Los Angeles multifamily market is a microcosm of what’s happening in the broader US market. Rents in the city have fallen, vacancies are up, and with the lifting of COVID restrictions on June 15, owners, operators, and residents are now waiting in limbo as the statewide eviction moratorium is set to expire at the end of June.
Apartment List’s June 2021 Rent Report quantifies this narrative. According to their data, Los Angeles is the only city in the metro that has seen rents fall, with a year-over-year decline of 2.2% (the median two-bedroom currently rents for $2,054, while one-bedrooms go for $1,566). It is important to note that this is a 2.2% decline from May 2020 to May 2021. Rents fell precipitously in the onset of the COVID-19 pandemic. According to Marcus & Millichap’s 1Q21 Los Angeles Multifamily Market Report, average effective rents fell 4.8% from 2019-2020.
To give more context to the Los Angeles story, it helps to look at the Greater Los Angeles area as a whole. Bolstered by out-migration from the congestion, cost, and social issues that L.A. faces, the surrounding areas are currently experiencing boom times. Santa Clarita has seen year-over-year rent growth of 9.4%. The median two-bedroom rents for $2,521, while one-bedrooms go for $2,017. In Irvine, rents grew 1.5% over the past month and 7.1% over the past year, bringing the median rent for a two-bedroom to $2,939. Long Beach has seen rents increase 1.3% over the past month and 4.4% over the past year. The median two-bedroom currently goes for $1,840.
But the superstar of Greater Los Angeles appears to be the Inland Empire, specifically Riverside County. In a Wall Street Journal analysis of US Postal Service change of address forms, researchers found that the county experienced the highest migration numbers in the state, with a net increase of over 10,000 households. As a result, the city of Riverside has seen some of the strongest rent performances of the past year. According to Apartment List’s June 2021 Riverside Rent Report, the city has seen year-over-year rent growth of nearly 13%.
Living preferences have indeed shifted, but it is unrealistic and unwise to consider Los Angeles “over.” The city notched a 1.3% increase in rents from April to May of this year, and multifamily investment activity in the region has surpassed pre-covid levels.
Clearly, Los Angeles will always be a desirable place to live and invest, but there are obstacles. Combined with pandemic-induced outbound migration, strict government regulation and rising utility costs have put downward pressure on net operating income. Property managers must seek creative solutions to boost NOI, including more efficient leasing, maintenance, and utility management workflows. This is where technology can help.
Use software tools to thoroughly vet applicants
In a 2018 study, Zillow found that 64% of L.A. residents rent rather than own. Due to such an elevated number, Los Angeles is one of many American cities with laws aimed at protecting this portion of the population. One such law, encompassing the entire state of California, is the resident’s right to a jury trial in an eviction case. Jury trials are time consuming because the resident can remain in the housing unit until a verdict is reached; expensive, due to the previously mentioned reason, plus legal fees; and uncertain because statistically, the majority of L.A. jurors will be renters themselves. Tenant screening can help prevent this and protect your bottom line.
Rather than dealing with third-party credit checks, consider the built-in tenant screening capabilities of your property management software that provide a comprehensive credit report with just a click. Then, based on criteria that you have previously set, including income to rent ratio, credit score, criminal history, and eviction history, these programs notify you whether your criteria has been met or not.
AppFolio takes tenant screening one step further with Income Verification. This functionality eliminates the need to manually verify pay stubs, bank statements, or job offer letters by automatically verifying the applicant’s bank information and active sources of income. It helps ensure authenticity and provides a more complete view of a renter’s financial situation.
However, once the applicant becomes a resident, there are still more rules and regulations to stay on top of.
Use online maintenance tracking tools to ensure maintenance requests and follow-ups are well-documented
The Apartment Association of Greater Los Angeles recently reported that, after more than three years of deliberation, L.A.’s Housing Committee has approved a citywide Tenant Anti-Harassment Ordinance that is expected to be adopted by the City Council in the very near term. It defines illegal harassment activities, such as “failing to perform and timely complete necessary repairs and maintenance required by State, County, or local housing, health, or safety laws,” and toughens civil and criminal penalties for property owners who violate the ordinance.
Since a delayed response to a maintenance request can have severe consequences, it’s more important than ever to have streamlined, reliable, and well-documented communications with residents. Maintenance requests of all kinds should be addressed right away, and modern property management software offers solutions to track your residents’ requests and provide timely follow up. Make sure to select a system that supports all mobile devices and allows for photos to be uploaded directly from a smartphone. Not only does this streamlined approach to property management and communication with residents reduce friction and lag — elements which can have costly consequences — but it goes a long way in building a mutually beneficial trust and rapport.
Use utility management software to promote sustainability and recover utility expenses
In the wake of a most unusual year, many owners and operators of multifamily real estate in Los Angeles are seeing stagnant or compressed NOI. The rising cost of building materials has put a dent in the bottom line of many, while utilities, which are historically subject to unforeseen and highly variable rate increases, are growing costlier. In 2018, Max Gomberg, the State Water Resources Control Board’s climate and conservation manager, said the price of water in California increased at six times the rate of inflation. With the entire state currently experiencing a severe and worsening drought, it is more important than ever to promote conservation efforts.
A National Multi-Housing Council and National Apartment Association study revealed that properties that use a Ratio Utility Billing System (RUBS) or submeters to charge residents for their utility consumption had a reduction of 6 to 27% in water usage. Knowing that the most effective conservation measures come when end-users are financially responsible, now is the time to charge residents for their utility consumption. In addition to promoting sustainability, it is a powerful way to turn an expense into income, driving NOI.
When it comes to charging residents for utilities, many property owners or management companies either:
- Do not pass these costs on to residents, or
- Pass these costs along, but do so using time-consuming, labor-intensive, and error-prone processes.
For those not charging residents for utility consumption, utility management software can you help implement a modern, streamlined utility bill-back program that significantly boosts NOI. For those currently billing residents for utilities, utility management software can radically enhance your submetering or Ratio Utility Billing System (RUBS) into a simple and painless process. The definitive how-to guide can be found here.
While it has been a difficult year for Los Angeles real estate, recent data brings hope to the city’s property owners and managers:
While L.A.’s economy is amongst the last to “come back,” it is coming back. According to Marcus & Millichap’s 1Q21 Los Angeles Multifamily Market Report, the metro has experienced a 2.6% growth in employment since last year. As employment rebounds, so should multifamily real estate. Now is the time to invest in modern property management technology to future-proof your business.