Why the rent is so damn high

Someone asked me yesterday why the rent in LA is so damn high.

Figured it would make an interesting post for the blog, so here goes:

Demand for close-in apartments in all major cities is growing due to:

  1. Demographics, eg more people in the prime rental age range of, says, 22-35; and
  2. A society-wide shift in preferences in favor of urban living at the expense of suburban / exurban living.

In a normal apartment market (eg not LA), this increased demand would result in:

  1. Small increases in the rent of every apartment, as landlords seek to benefit from increased demand
  2. Increased development of new apartments, eventually leading to stabilizing or declining rents

In LA, the above doesn’t happen, or at least not as efficiently.

Because most of LA’s units are covered by rent control, and many of those tenants are paying under-market rents and won’t ever move, the price impact of increases in demand are not spread evenly over the entire market. Instead, they are concentrated in the (relatively) small number of apartments that are actually available to rent (eg those which are vacant or not covered by rent control).

So, asking rents for the apartments available in the spot market shoot up.

In an ordinary city, you would expect those high rents to entice developers to build, eventually increasing supply and thereby moderating or reversing rent growth.

In LA, zoning makes it extremely difficult to build new units, both in terms of the cost of the projects and how long they take. So, the supply side is basically incapable of keeping up with demand, except in cases of severe recession (where demand is “artificially” reduced).

That, my friends, is not a good recipe for keeping housing affordable. But it’s a great recipe for making money if you’re a (smart) landlord.