How Apartment Rents Can Impact Commercial Real Estate
This past January, a new study came out that shocked me. Even more shocking is that many people didn’t seem to register the impact of the study, or just overlooked it. What I’m talking about is the study that compares apartment rent costs across the country. With an average price of $4,799, Santa Monica now has the highest apartment rents in the nation, followed by New York. Even more surprising is that Venice, just to the south of Santa Monica is now rated number 5 in the nation, having the dubious distinction of beating out San Francisco. Other than making apartments look like a good investment for the future, what does this mean for our local economy?
Not surprisingly, the Los Angeles Business Journal ran another article a month later about how companies are looking to relocate out of Los Angeles. One of the reasons cited was that the companies were having a difficult time recruiting employees due to the high cost of housing. When we take a closer look at this, it is not just the large companies that are being impacted.
I predict that one of the sectors to be affected will be the local retailers and small businesses. Retailers and small businesses just cannot afford to pay more for their workers. Retailers are already being impacted by e-commerce sites and smaller businesses just don’t have the ability to competitively attract employees by offering additional benefits. Retailers do not have the option of increasing their prices to compensate for larger payroll. To compensate, they will have to adjust how they do business. After cost of goods and payroll (two items retailers really have little control over), a retailer’s largest expense is the rent on their location. This may be the quickest way, and have the biggest impact, to lower overhead for a retailer.
Retail companies can do this by two ways. Either by moving to smaller spaces, or requesting rent reductions. Either method affects the owners of retail buildings. Landlords will need to look to either reconfigure their spaces, be smart in attracting tenants whose businesses complement one another, or look to reduce rent to keep long standing tenants at their locations. The least expensive (out of pocket) method would be to reduce the rental rates. This will have a short term impact, but also affects the value of the building, which may have long term refinancing impact. By adapting the structure of the shopping center to reflect the changes in the retail submarket, an owner will have better long term stability. It may cost more to do so, but wise landlords are already looking to make these changes.
Businesses in general will also have a hard time attracting employees. As the cost of living goes up in these neighborhoods, many employees, out of necessity, choose to move further away. This coupled with traffic and other competing employers will likely cause businesses to lose employees. Smart businesses will look to adjust work hours to compensate for traffic, or look to relocate along transit corridors with easily accessible public transit, and in some cases paying for the cost of public transit.
This problem is not just a Santa Monica or Venice problem. The greater Los Angeles area already has the 5th highest housing rental rates for any major metropolitan area. This is unlikely to change with some studies predicting Los Angeles’ population to swell by 3 fold within the next 10 years. If this happens, Los Angeles will be the densest city in the United States. Even if the predictions are off by a double, it still means that the population will grow from its current 3.9 million people to over 8 million people. New construction starts will have a difficult time keeping up with this growth, which will in turn just cause rents to swell well above what we are already seeing.
Overall, for businesses and landlords to survive, like everything else, we must adapt. The most adaptable businesses, whether from a viewpoint of their business model, or by repositioning themselves will be the ones which we will see around in the future. I’m not saying that I know what will happen in the next ten years, but if the past is any indication, it will be a very interesting ride!