Los Angeles 3Q15 LAR

Los Angeles County Third Quarter 2015

Investors Look Past Construction Risks, Pursue AssetsThe Los Angeles county multifamily market remains robust as organizations expand their payrolls. While the pace of hiring is slower than its highest level seen during 2013, growth remains broad-based and consistent with a strengthening economy. The new employees of these firms are seeking apartments at a heightened pace as the swelling prices for single-family homes make homeownership impossible for many metro residents. Builders have used these factors to justify adding multiple projects to the pipeline of activity, particularly in downtown Los Angeles, where several luxury towers are underway, and the San Fernando Valley, where more affordable rents can be obtained. Construction in these two areas will outpace demand this year, prompting increases in vacancy as more than 7,000 units come online. The outlook is much brighter in the Westside Cities and the South Bay/Long Beach markets, where technology firms are placing roots and planned completions are more muted. Despite overdevel-opment concerns in some areas, vacancy rates will remain sufficiently tight, allowing a rise in average asking rent.

Market participants are unfazed by the construction outlook for multifamily housing, using historically low interest rates and easy access to commercial credit to bid aggressively on properties throughout the county. The resulting environment has led to deteriorating first-year yields as potential buyers place their best offers first, particularly on trophy assets in the Westside Cities and value-add complexes in the San Fernando Valley and South Bay. The average property now yields 5.1 percent, with many prime areas exchanging ownership in the low-4 percent range. Market participants view the elevated level of construction as a transitory issue, focusing on the structural impediments to homeownership to underpin their the-sis. As investors weigh a possible interest rate hike from the Federal Reserve for the first time in nearly a decade, transaction velocity will stay elevated. Buyers seeking to deploy capital into the metro will take advantage of the increase in listings, fostering further deterioration in cap rates.

2015 Annual Apartment Forecast

2.4%increase in

totalemployment

8,600units

will becompleted

50 basispoint

increase invacancy

4.8%increase in

effectiverents

Employment: More than 104,000 workers will find gainful employment this year, a 2.4 per-cent growth rate. In the previous year, 97,900 jobs were created, a 2.3 percent rise.

Construction: The pace of deliveries will moderate somewhat as more than 8,600 units come to market this year. In 2014, nearly 10,000 rentals were placed into service.

Vacancy: Growing supply will limit net absorption in apartments this year, ushering in a 50-basis-point increase in vacancy to 3.5 percent by year end. Although the market will weaken this year, the average vacancy rate will remain incredibly tight.

Rents: The average effective rent will move up 4.8 percent to $1,870 per month this year. Last year, the average effective rent climbed 6.4 percent.

Economy ■ Local employers added 18,200 jobs in the second quarter, improving job cre-ation during the year to more than 98,700 positions and expanding payrolls by 2.4 percent. In the previous year, 99,600 workers were hired.

■ Accelerating economic development led organizations in the education and health services sector to add more than 30,300 positions during the year, the strongest growth in the metro. The trade, transportation and utilities and pro-fessional and business services sectors also outperformed, boosting headcounts by 18,000 and 14,800, respectively.

■ Since its height at 12.6 percent, the unemployment rate was down 500 basis points to 7.6 percent in the second quarter of this year. Economic improve-ment continues to accelerate this progress, with unemployment falling 50 basis points over the past year.

■ Outlook: Los Angeles County organizations will add 104,000 workers this year, a 2.4 percent growth rate. In 2014, 97,900 jobs were created, a 2.3 percent expansion.

Housing and Demographics ■ During the last year, multifamily and single-family housing permit issuance expanded 29 percent and 8.5 percent, respectively. While single-family per-mitting remains well below its 2007 peak, multifamily has set new highs.

■ Over the past 12 months, the average single-family house price rose 7.5 per-cent to more than $495,000. Meanwhile, the average median household in-come ticked up 3.4 percent to just under $57,000.

■ The minimum qualifying household income for a single-family mortgage with taxes and insurance is more than $112,600 per year. Additionally, the average effective rent was $1,850 at the end of the second quarter. The re-sulting affordability gap, of nearly $700, and the high minimum qualifying household income required for mortgages limit the possibility of homeown-ership for many residents.

■ Outlook: The large income gap between the average and the qualifying in-comes needed for mortgages will require many potential buyers to put off homeownership, or eliminate the possibility all together. This environment will foster strength in rental rates for the foreseeable future.

Construction ■ Construction firms completed more than 1,000 rentals during the second quarter, bringing year-to-date deliveries to more than 5,000 apartments. The bulk of development was centered on the Downtown Los Angeles and San Fernando Valley; the two submarkets received more than 3,800 units.

■ Robust demand for apartments has led builders to expand the pipeline of multifamily projects to more than 18,000 rentals slated for delivery through 2018. More than 14,600 will come to market during the next 18 months.

■ More than 60 percent of under construction apartments are in Downtown Los Angeles, highlighting the live-work-play mindset that builders are cater-ing toward.

■ Outlook: Developers will complete more than 8,600 units this year, down modestly from the nearly 10,000 rentals finished in 2014.

page 2 Marcus & Millichap u Apartment Research Report

Employment TrendsMetro United States

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Home Price TrendsMetro United States

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Effective Rent Trends by Submarket 2015*

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* Forecast** Trailing 12-month period through 1Q

Vacancy ■ Countywide vacancy fell 20 basis points to 3 percent during the second quar-ter as demand for apartments continued to accelerate. Vacancy has fallen 30 basis points over the last 12 months.

■ Pre-1980s construction remains in high demand throughout the metro, with 1970s developments posting vacancy at just 2.2 percent, while pre-1970s projects registered 2.3 percent.

■ Three-bedroom rentals in Los Angeles County are the most demanded by tenants; the vacancy rate is at 1.2 percent, the lowest rate recorded. Soaring effective rents have made the option more popular among young profession-als seeking to live in expensive neighborhoods together with roommates.

■ Outlook: The higher pace of construction and weaker net absorption will augur a 50-basis-point increase in vacancy to 3.5 percent by year end. Despite the rise in vacancy, the market remains extremely tight.

Rents ■ The average effective rent rose 1.7 percent to $1,830 during the last three months, bringing year-to-date gains to 6.5 percent. Rent growth above infla-tion has been the standard due to the high cost of single-family housing.

■ Properties developed during the 2000s have average effective rents that are more than $600 higher than the closest rival, with ownership asking nearly $2,370 per month as builders deliver apartments loaded with amenities to attract tenants.

■ Buildings completed during the 1970s and 1980s have average effective rents that are nearly $200 cheaper per month than both older and newer assets. As renters seek more affordable options, the spread between rent levels will tighten considerably.

■ Outlook: Demand for multifamily housing will lead to a 4.8 percent swell in the average effective rent to $1,870 per month.

Sales Trends** ■ Transaction activity jumped more than 40 percent as real estate prices contin-ued to improve, providing fresh incentive for property owners to list. Volume accelerated throughout 2014 and has remained elevated during the first six months of this year.

■ While trading spiked dramatically, the average price per unit ticked up 16 percent to more than $319,000. Price appreciation was apparent in the West-side Cities, where the average trade valued each apartment above $425,000. Transactions were most abundant in the San Fernando Valley, the most af-fordable of the submarkets in Los Angeles County.

■ The enhanced listing environment allowed investors more opportunity to ex-pand their portfolios and they did so willingly, scooping up assets in Down-town Los Angeles and the San Fernando Valley at impressive rates. Cap rates fell 40 basis points to average 5.1 percent by the close of the second quarter.

■ Outlook: The impending rate hike hinted by the Federal Reserve will encour-age market participants to evaluate their holdings in the first rising rate cycle in more than a decade. This will prompt owners to list additional properties, while investors will use historically low interest rates to bid aggressively on available assets, fostering robust transaction velocity.

Marcus & Millichap u Apartment Research Report page 3


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Los Angeles County

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* Forecast** Trailing 12 months through 2Q

Sources: CoStar Group, Inc.; Real Capital Analytics

Downtown Los Angeles Apartment MarketConstruction and Vacancy

■ Builders brought more than 2,600 rentals to market during the last year, the largest source of construction in the county. The trend is set to continue; developers will widen the multifamily pipeline to nearly 12,000 units with delivery dates scheduled through 2018.

■ Downtown Los Angeles received the two largest completions of the past 12 months: Eastown Apartments in Hollywood containing 535 apartments and One Santa Fe on Santa Fe Avenue in Los Angeles with 438 rentals. Both proj-ects highlight the renewed emphasis on urban development.

■ Vacancy fell 20 basis points in the second quarter to 3.4 percent, even with the same period one year ago, as increased construction limited the effects of accelerating demand. Improvement was most pronounced in Hollywood, where vacancy fell 60 basis points to 3.4 percent.

■ Outlook: Construction firms will bring more than 4,400 units to market this year, the most in several years. The resulting environment will foster average vacancy of 3.7 percent, 10 basis points above a year ago.

Rents

■ The average effective rent jumped 4.5 percent to $2,120 per month, with strong gains in all three submarkets. Hollywood outperformed the broader area as rents climbed 5.6 percent.

■ While the average effective rent is 4.6 percent above last year’s levels in Down-town Los Angeles, property owners have been slashing rents in the last six months to fill vacant space. Rents are more than $90 per month off the high seen in the fourth quarter of 2014.

■ The robust concentration of development limited 2000s assets to small gains in effective rents, particularly in the Mid-Wilshire submarket, which recorded a 1.6 percent advancement. Strong competition from amenities-laden rentals has provided switching options for high-end tenants.

■ Outlook: The pace of average effective rent growth will slow dramatically as numerous luxury towers come to market in the second half of the year, limit-ing owners to just a 1.2 percent uptick year over year.

Sales Trends **

■ Over the past year, transaction velocity jumped 22.4 percent as investors take long-term positions in the face of short-term weakness. The average price per transaction topped $10 million for the first time in three years.

■ The average price per unit swelled 6.8 percent to more than $280,000 as several high-profile trades in Downtown Los Angeles and West Hollywood at more than $350,000 per unit brought up the averages. Value-add transac-tions in East Hollywood traded for $230,000 per unit.

■ First-year yields have slid 20 basis points to 4.7 percent as a number of deals in the Mid-Wilshire area traded in the low-4 percent range. The impact would have been greater without a surge of trading in Koreatown and Hollywood in the mid-5 percent range.

■ Outlook: Investors seeking to position in the Greater Downtown Los Ange-les area will stay active despite the recent pickup in construction. These buy-ers are focused on the longer-term supply and demand picture.


Vacancy Rate Trends

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Greater DowntownGreater Downtown Greater Downtown

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Westside Cities Apartment MarketConstruction and Vacancy

■ Builders completed slightly more than 440 rentals in the Westside Cities over the past 12 months. The bulk of the new stock was brought to market in the Brentwood/Westwood/Beverly Hills enclave, while the largest project was a 100-unit affordable housing complex in Venice.

■ For the remaining six months of 2015, development will shift to the Santa Monica/Marina del Rey and Palms/Mar Vista submarkets. The pace of deliv-eries will also rise to more than 480 rentals as crews finish work on NMS@Culver City in Culver City and Sway in Santa Monica. The two projects will supply 130 and 120 units, respectively.

■ Tenants flocked to more affordable housing in the Palms/Mar Vista area as vacancy fell 90 basis points, while the Santa Monica/Marina del Rey submar-ket vacancy plummeted 170 basis points to 2.3 percent. As a result, vacancy in the Westside Cities fell 80 basis points to just 2.1 percent, making it the tightest market in Los Angeles County.

■ Outlook: While construction will quicken in the latter half of this year, it will do little to meet the demand for new apartments. Overall, the market will contract 80 basis points to 2.3 percent.

Rents

■ Outperformance in Brentwood/Westwood/Beverly Hills and Palms/Mar Vis-ta submarkets led the average effective rent to climb 6.6 percent year over year to more than $2,700 per month.

■ Properties in Palms/Mar Vista reported average effective rents of $2,175 per month at the close of the second quarter, more than $150 higher than the same period last year. Despite the recent gains, prices remain more than $700 below the other enclaves in the Westside Cities.

■ The average effective rent in Brentwood/Westwood/Beverly Hills advanced 13.1 percent to nearly $3,000 per month over the last year as a lack of devel-opment and robust demand pushed prices higher.

■ Outlook: Demand will remain well ahead of the minimal growth in supply, allowing the average effective rent to rise 6.2 percent to $2,800 per month.

Sales Trends **

■ Transaction activity was largely unchanged over the past four quarters as a lack of listings held back deal flow. The vast majority of transactions targeted the Beverly Hills/Century City/UCLA, Santa Monica and Greater Culver City submarkets.

■ The average price per unit climbed to more than $500,000 per unit as a number of deals in the West County submarket traded at above $700,000 per unit. Market participants are focused on price appreciation, bidding aggres-sively for assets located in prime locations.

■ Cap rates in closed transactions generally start in the low-4 percent range for the best-quality properties, while the bulk of trading is in the mid-4 to high-4 percent range.

■ Outlook: Rising asset values will move current owners to consider listing, while potential buyers will seek to deploy capital ahead of the anticipated Federal Reserve interest rate hike.


Vacancy Rate Trends

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San Fernando Valley Apartment MarketConstruction and Vacancy

■ Construction crews completed 1,100 apartments over the past year, nearly a third less than the prior four-quarter period. Despite the recent slowdown, developers remain highly active in the area; more than 3,300 will be com-pleted in the next 18 months.

■ The largest complex finished during the last year was The Millennium Wood-land Hills. The 395-rental, three-building project came online during the fourth quarter of 2014. Another notable addition to the area was Camden Glendale on San Fernando Road, which contains nearly 300 units.

■ Vacancy levels were unchanged in the second quarter at 2.8 percent, down 10 basis points from the same period in the prior year. Assets in the North-ridge/Northwest San Fernando Valley area registered the strongest growth as vacancy fell 50 basis points to 2.4 percent.

■ Outlook: An influx of completions concentrated in the back half of the year will lead vacancy 20 basis points higher to 3 percent in 2015. Weakness is likely to remain transitory as tenants seek cheaper alternatives.

Rents

■ The average effective rent climbed 6.8 percent to $1,615 per month amid widespread demand for more affordable housing in Los Angeles County. All submarkets posted high single-digit or double-digit gains.

■ Properties in the Van Nuys/Northeast San Fernando Valley recorded average effective rent advancement of 11.8 percent to $1,460 during the last year as tenant demand surged. Despite the improvement, rents remain more than $500 below other parts of the Valley.

■ The accelerated pace of economic expansion led more affluent renters to Woodland Hills rentals, where the average effective rent swelled 8.9 percent to more than $1,920 per month.

■ Outlook: Accelerated construction in the Burbank/Glendale/Pasadena and Van Nuys/Northeast San Fernando Valley submarkets will limit the pace of effective rent gains to 6.5 percent this year.

Sales Trends **

■ Trading volume rose 20 percent as investors sought relatively higher yields in the mid- to high-5 percent range. Sellers were motivated by tightening condi-tions and rising asset values in key neighborhoods.

■ The average price per unit rose to more than $210,000, up 16 percent com-pared to the prior year. A number of deals in Burbank and Glendale ex-changed ownership at more than $330,000 per unit, elevating the average.

■ Cap rates sank broadly to the mid-5 percent range, down 30 basis points over the last 12 months. Assets in Sherman Oaks an Woodland Hills traded in the high-4 percent range, while several North San Fernando Valley properties were contracted with implied yields in the high-5 percent range.

■ Outlook: As investors continue to be priced out of more expensive mar-kets in Los Angeles County, demand for San Fernando Valley complexes will mount. Assets near major thoroughfares and employment hubs will receive multiple offers, often in excess of the asking price.


Vacancy Rate Trends

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South Bay/Long Beach Apartment MarketConstruction and Vacancy

■ Builders brought more than 750 rentals to market during the last four quar-ters, the fastest pace of construction in the current cycle. In the previous year just 170 apartments came online.

■ The 260-unit Playa del Oro West in Playa del Rey and the 220-unit Runway at Play Vista in the Alsace neighborhood highlighted completions over the past year. Meta Housing Corp. also completed nearly 100 affordable-housing rentals through two separate projects in San Pedro and Torrance and a senior-housing facility in Long Beach.

■ Vacancy ticked up 10 basis points to 2.9 percent in the second quarter, elimi-nating the improvement seen in the past year. While demand for apartments remains robust, the elevated pace of construction is limiting further tighten-ing in the market.

■ Outlook: The rise of the Silicon Beach technology scene has produced re-markable demand for multifamily housing, yet the expansion of supply will push vacancy 40 basis points higher to 3.2 percent.

Rents

■ The average asking rent advanced 6.2 percent during the last year, ending the second quarter at $1,765 per month, as potential tenants outweigh available rentals. The area provides a cheaper alternative to the Westside Cities where rents are more than $500 higher per month.

■ Assets in the South Bay posted average rental rates that ascended 6.8 per-cent to more than $2,040 per month as renters flocked to apartments within proximity to their employers. Properties built in the 2000s were in particular demand, expanding 8.9 percent to more than $2,675 per month.

■ While all Long Beach vintages benefited from rising average asking rent, 1970s and 1980s registered gains of 10.5 percent to more than $1,400 per month and 9.5 percent to more than $1,550, respectively.

■ Outlook: Lower rental rates will keep demand higher than supply despite more elevated levels of development. However, the pace of improvement will marginalize as more than 1,700 units come online during the next 18 months.

Sales Trends **

■ Transactions jumped significantly during the last year as the resolution of the port dispute encouraged buyers to place capital. The average transaction price was more than $12 million, up more than 40 percent year over year, as larger properties dominated trading.

■ The average price per unit was essentially unchanged, rising 2.3 percent for the year to more than $260,000 per unit. Properties in the Torrance submar-ket surged 30 percent to more than $225,000 per unit.

■ First-year yields fell 10 basis points to 5 percent as higher-quality assets en-couraged buyers to bid more aggressively. Investor focus has been primarily on complexes in Long Beach, where yields are higher than the average.

■ Outlook: Strengthening employment growth in the area will lead investors to deploy capital in the South Bay/Long Beach markets, where first-year returns can be more than 100 basis points above comparable offerings.


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Capital MarketsBy WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

■ Despite volatility surrounding economic growth in China and Greece’s status in the eurozone, the yield on the 10-year U.S. Treasury is trading near 2.25 percent. Economic data is showing improvement following weak first quarter GDP, with market participants now positioning for the December meeting as the most likely starting point for an interest rate hike. The latest comments from Federal Reserve Chairwoman Janet Yellen, however, indicate that the exact moment is still data-dependent.

■ The Federal Open Market Committee has committed to a policy of “lower for longer” as it assuages fears that the first interest rate increase will disrupt the recovery. The first policy rate change is expected to be just 25 basis points, and measures will remain accommodative for some time.

■ Agency lenders are underwriting 10-year multifamily loans ranging between 4.3 and 4.7 percent with average LTVs from 55 to 75 percent. Portfolio lend-ers are offering similar loan-to-value ratios with interest rates between 3.85 and 4.50 percent as underwriters have become more competitive in an effort to do business. Floating bridge loans for stabilized assets will require LTVs of 70 percent and price with a spread between 250 and 425 basis points over LIBOR, while value-add transactions will be underwritten at 80 percent LTV (60 to 65 percent of cost) with a 300- to 475-basis-point spread.

■ Total CMBS issuance is expected to top 2014 levels this year as $100 billion to $125 billion is underwritten. A wave of pre-crisis loans will start to come due over the next few years, prompting refinancing as current owners renegotiate the capital structure of their assets. Through April, $35.8 billion in CMBS had been originated, underscoring the availability of credit as credit unions, insurance companies and alternative asset managers expanded their offerings.

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; CoreLogic, Inc.; Economy.com; National Association of Realtors; Real Capital Analytics; MPF Research; TWR/Dodge Pipeline; U.S. Census Bureau.

Visit www.NationalMultiHousingGroup.com or call:John SebreeVice President, National DirectorNational Multi Housing GroupTel: (317) [email protected]

Prepared and edited by Aaron Martens

Research Associate, Research Services

For information on national apartment trends, contactJohn Chang

First Vice President, Research ServicesTel: (602) 687-6700

[email protected]

Los Angeles Office:Enrique Wong

Vice President/Regional [email protected]

515 South Flower Street, Suite 500Los Angeles, California 90071

Tel: (213) 943-1800Fax: (213) 943-1810

West Los Angeles Office:Tony Solomon

Vice President/Regional [email protected]

12100 West Olympic Boulevard, Suite 350Los Angeles, California 90064

Tel: (310) 909-5500Fax: (310) 909-5510

Long Beach Office:Damon Wyler

Regional [email protected] One World Trade Center, Suite 2100

Long Beach, California 90831Tel: (562) 257-1200Fax: (562) 257-1210

Encino Office:Adam Christofferson

First Vice President/District [email protected]

James MarkelAssociate Regional Manager

[email protected] First Financial Plaza

16830 Ventura Boulevard, Suite 100Encino, California 91436

Price: $150

© Marcus & Millichap 2015www.MarcusMillichap.com

Submarket Vacancy Ranking Vacancy Y-O-Y Basis Effective Y-O-Y Rank Submarket Rate Point Change Rents % Change1 South Los Angeles 1.5% 190 $1,408 3.6%2 Southeast Los Angeles 1.9% 150 $1,391 6.0%3 Palms/Mar Vista 1.9% 90 $2,175 7.1%4 East Los Angeles 2.0% 10 $1,189 -2.3%5 Brentwood/Westwood/Beverly Hills 2.1% 10 $2,939 13.1%6 Santa Monica/Marina del Rey 2.3% 170 $3,091 4.9%7 Van Nuys/NE San Fernando Valley 2.3% -10 $1,403 11.8%8 Northridge/NW San Fernando Valley 2.4% 50 $1,464 8.5%9 Mid-Wilshire 2.6% -30 $2,035 3.6%10 South Bay 2.8% -10 $2,042 6.4%11 Long Beach 3.0% -20 $1,571 7.6%12 Santa Clarita Valley 3.1% 120 $1,698 4.2%13 Sherman Oaks/North Hollywood/Encino 3.2% 0 $1,964 7.9%14 Burbank/Glendale/Pasadena 3.3% 0 $1,979 5.6%15 Antelope Valley 3.3% 280 $923 8.8%16 Hollywood 3.4% 60 $2,187 5.3%17 Woodland Hills 3.6% 30 $1,923 8.5%18 South San Gabriel Valley 3.7% -160 $1,425 4.4%19 North San Gabriel Valley 4.7% -150 $1,344 3.4%20 Downtown Los Angeles 5.0% 0 $2,129 4.7%

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