Alternatives

The ongoing allure of LA real estate

Comfortably sitting in the top 10 of the Schroders Top 30 Global Cities Index, property in Los Angeles boasts a number of positives. Here we outline some of the reasons why we think real estate investors should sit up and take notice

12/20/2016

Ryan Bennett

Ryan Bennett

Securities Analyst, Real Estate

City: Los Angeles, California

Index ranking: 6

Share of national economy: 5.81

Strengths

-       A diversified economy

-       Largest port in the US

-       Natural terrain and government regulation make new construction challenging

Weakness

-       Poor public transit

-       High housing costs

What makes Los Angeles a global city 

We are all relatively positive on the prospects for Los Angeles across the major property types – residential, office, retail and industrial. One of the key strength of LA’s economy is that it is well diversified across multiple industries including financial services, media, trade and technology. 

The City of Angels has long been famous for Hollywood and the hub of entertainment jobs it has created. But it is other sectors that should catch the eye of a property investor. The technology sector, in particular, has grown substantially over the past few years, and this has not only boosted demand for office space but also for residential property, much of it due to increased hiring of millennials.

The role of tech

Technology’s rise has been demonstrated by Netflix’s recent office expansions with the real estate company Hudson Pacific over the past two years as well as Google’s development of Playa Vista, a new urban community on the west side of the city.   

The role of infrastructure

Infrastructure has a huge role in making a global city, and LA boasts two of the biggest ports in the world. This helps drive the need for distribution warehouses.

Building industrial properties in the urban core of the city is tricky due to an onerous permit process, meaning supply is constrained. This increases the value of already established distribution real estate properties and the companies that own them such as Rexford Industrial and Terreno.

The role of tourism

LA is, of course, an attractive tourist destination. While the strength of the US dollar has been a near-term headwind, long-run positives such as the rise of the Asian traveller have placed West Coast cities like LA in a good position for the future. We are particularly comforted by iconic, irreplaceable retail centres such as Federal Realty’s Third Street Promenade in Santa Monica and Westfield’s Century City, near to Beverly Hills.

Our verdict

In the near term, the fundamentals of LA property remain strong while other parts of the US have seen a slow down of late. The reason? LA was one of the last markets to recover from the last recession.

As a result of a slower pickup in demand as well as more difficult development regulations relative to the rest of the US, new construction has been somewhat muted thus far, creating a favorable balance of supply and demand dynamic across most type of property.

 

1. U.S. Bureau of Economic Analysis, July 2016

The sectors, regions and companies mentioned in this article are for illustrative purposes and not a recommendation to buy or sell. 

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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.