REAL ESTATE NEWS

The shock to the housing market from the devastating wildfires in Los Angeles County is expected to spur a large spike in rental rates in an undersupplied metro with low vacancy where rents have been flat for the past year.

As this is being written, the wildfires in Los Angeles County have burned more than 54 square miles, destroyed an estimated 10,000 structures and forced 180,000 people to evacuate.

“Doubling of growth or tripling of rent growth is absolutely possible,” Selma Hepp, chief economist at CoreLogic, told MarketWatch.

The availability of some rentals could spread by word of mouth as displaced homeowners seek shelter, which is not captured by real-estate models, so the increase in rent prices could even be higher, Hepp added.

The wildfire disaster in L.A. will cause a major shock to the housing market throughout Southern California, said Jay Lybik, CoStar’s director of multifamily analytics. Lybik projects that rent in Los Angeles could rise by 8% to 12%, MarketWatch reported.

The state of emergency for Los Angeles County declared last week by Gov. Gavin Newsom includes protections against price-gouging.

According to the California attorney general’s office, landlords generally are prohibited from charging more than 10% above what they were or advertising before the state of emergency, which took effect Jan. 7.

If a home was not rented or advertised before the state of emergency, landlords can’t charge more than 160% of fair market value as determined by the U.S. Department of Housing and Urban Development, the Los Angeles Times reported.

According to data supplied by L.A. officials, 54% of the residents in Los Angeles County are renters and nearly 60% of them are cost-burdened, meaning they spend more than 30% of their household income on rent.

The vacancy rate in the Los Angeles County multifamily market is one of the lowest among U.S. metros. The multifamily occupancy rate in the Greater Los Angeles market hit 95.2% with an average effective rent of $2,257 per unit at the end of Q3 2024, according to Colliers data.

Skyrocketing home prices and a shortage of inventory have taken buyers out of the market for single-family homes in Los Angeles, where the median sale price for single-family homes and condos hit $1.8M in Q3 2024, according to appraisal firm Miller Samuel.

The wildfire disaster comes as Greater Los Angeles continues to fall behind the production goals it has set to meet a severe housing shortage. By its own estimate, Los Angeles said it must add 457K units by 2029.

According to data from the Los Angeles Department of Building and Safety compiled by Crosstown LA, the number of multifamily building permits issued by L.A, dropped to a 10-year low in 2024, with only 3,860 units approved, as of Nov. 30.

The massive damage from the Los Angeles wildfires is likely to raise insurance rates throughout the state. Carriers have pulled back from renewing policies in wildfire-prone areas of the Golden State in the past two years, pushing an increasing percentage of property owners into the state’s FAIR Plan, California’s insurer of last resort.

According to an analysis by the San Francisco Chronicle, the FAIR Plan has an estimated $25B in exposure from residential and commercial policies in areas impacted by the Los Angeles County wildfires. As of last summer, the Plan had less than $400M in reserves to pay for claims.

Under state law, if the FAIR Plan is overwhelmed with claims, it can charge regular insurers operating in the state, charges that could get passed on to their policyholders.

State regulators are trying to encourage carriers to return to the market by allowing them to incorporate the cost of reinsurance, calculated by forward-looking catastrophe models, into their rate hike requests.

In the wake of the wildfire disaster in Los Angeles County, these rate hikes may be even larger than insurers might otherwise have planned, Michael Wara, director of the Climate and Energy Program at Stanford University, told The Chronicle.

“We’re having one of the worst-case scenarios play out right now,” Wara said.

Source: GlobeSt/ALM