The real estate sector rarely hit the headlines throughout this year’s presidential race, so it’s no great surprise that this month’s shocking election results have had minimal impact on the market. As predicted last month, the apartment rental market is still on an upswing. Despite buyers having access to record low borrowing rates, the California rental market continues to benefit from higher rental rates and more investment.
This is despite the nationwide apartment rental market continuing its steady decline. October was the second straight month that US monthly rents fell and the biggest drop in three years. Two standout factors are responsible for this deceleration. First, outsize growth in excess of 9% seen in many metros throughout 2015 had moderated to around half the figure. Second, the spate of high-end lifestyle apartments has also put a lid on rent growth in many metros, but the relative affluence of LA residents and their ability to afford new luxury apartments goes some way in explaining why California continues to buck the national trend.
Several California metros led the country in year-on-year average rental growth in October. This is according to data compiled by a monthly survey of 123 markets, which found that Inland Empire, Orange County, and San Diego far outperformed the national year-on-year average growth of 4.4%, ranking at 7.4%, 7.2%, and 7.2% respectively. Affordability and job growth are the main factors responsible for this growth. Inland Empire remains very affordable compared to nearby Los Angeles and boasts 3% job growth and a 1.2% increase in supply. Orange County, too, has added jobs at a rate of 2.9%
Renovate Rather Than Invest
News of a strong SoCal market may have owners calling their mortgage brokers in the hopes of reinvesting profits into another apartment block. But now might not be the ideal time to reinvest in a new property. That’s because it’s a seller’s market and here’s why:
- Multifamily starts are at a two-year low. It’s not just rental rates that are seeing significant drops nationwide. Multifamily construction has taken a backseat to single-family housing in 2016. While single-family starts surged to a 783,000-unit pace last month—an increase of 8.1%–starts for multifamilies plunged to the lowest level since June 2014. Property prices are fuelled by supply as much as demand, and without the promise of new apartments hitting the market, you may end up paying a premium.
- Multifamily sales are up 8.2% on the year to date. Investor confidence is huge in the multifamily sector. This is the fifth straight quarter of sales in excess of $30 billion ($31.6 billion this quarter). Competition is already fierce with major players such as LaSalle and Greystar making moves in California.
- Seasonal drop in listings. The first and last months of the year are very rarely the best time to purchase a new property. Listings naturally fall around this time of year, increasing the competition for the few apartments available.
With fewer future listings and major corporations already investing heavily into the sector, owners may find they get more bang for their buck by renovating current properties and taking advantage of the higher rental rates that the SoCal area commands. Options abound when it comes to adding new amenities. Very few multifamilies offer everything and you may be able to increase rental income by adding one or two of the following:
- Fitness centers are one of the most sought after amenities in the rental market, and one that 46% of renters are willing to pay extra for. When tenants are paying upwards of $100 for gym membership, rent increases of $50 are going to look like a bargain for fitness-conscious tenants keen to have a fitness center at their doorstep.
- Rooftop decks provide an element of luxury to any multifamilly and much needed outdoor space in DTLA. Include a viewing deck, swimming pool, and outdoor lounge area, and you have another feature that LA’s affluent renters will be willing to pay additional rent to enjoy.
- Security Upgrades are always going to be welcomed by residents, and often in the form of higher rents. Consider adding keyless entry and upgrading your security technology to increase your bottom line and ROI.
- Alternatively, generate a different stream of income by renovating retail and restaurant space in your multifamily property. As well as another direct source of rent, renovations of this type that make your property a destination can also indirectly boost your occupancy and retention rates.
With many of these renovations costing less than five figures and potential rent increases on offer in the range of 10-50%, many owners will find that returns on investments can be higher and achieved quicker by renovating their current portfolio of properties rather than investing in a new multifamily building.
Looking Ahead After the Election
Let’s round things off this month by taking a look at how the rental market has reacted to this month’s presidential election. Real Estate was one of the few sectors that remained out of the spotlight in the run-up to November 8th and most economists seem to be holding firm on their forecasts for 2017, despite the surprising election results. However, should some of Mr. Trump’s wider policies come into force, multifamily owners may anticipate the following potential fluctuations in the Californian rental market:
- Decrease in demand from immigrants. California has more immigrants than any other state—10 million in total with one-in-four residents born outside of the US. Should the President-elect carry out his crackdown on immigration and illegal immigrants, many of California’s immigrant population may find themselves leaving the country by choice or by force. With half of all immigrants living in rented accommodation, SoCal multifamily owners may find themselves with lower-than-normal occupancy rates within the next two years.
- Even more jobs and housing demand with it. Should Mr. Trump fulfill his pledge to re-patronize US jobs that are currently leaving the country, then even more jobs may be created in California. The state is currently leading the country in job creation and added 62,000 jobs in August of this year—that’s 42% of the US total for the month—and this could be set to continue into the new year and beyond. Of course, more jobs means higher demand, especially in the rental sector where employees relocating to the area will typically look to rent whilst getting established.
- Housing may become even less affordable. That’s if Mr. Trump remains committed to slashing tax rates and increasing spending. This would lead to a higher deficit, which would likely raise inflation and interest rates, including mortgage rates. Higher mortgage rates would make becoming a homeowner a goal that is out of reach of even more people, further swelling demand for the rental market—or at least not diminishing it, all things being equal.
This is, of course, merely speculation. The only thing we can be sure of is that our California multifamily market continues to outperform national averages, and that renovations are a smart alternative to buying new properties when it comes to increased ROI. For more information on how you can take advantage of this trend, pick up the phone and speak to one of our advisors today.