Estate and the Casden Real Estate Economics
The conclusion they draw is that approximately 97% of apartments in Los
Angeles, Orange, Riverside, San Diego and San Bernardino counties are
rented. The average monthly rent at the end of last year was $1,416, and
under free market conditions unsuppressed by rent control, rent increases
of 6-7% are forecast in Los Angeles. In Orange County, the average monthly
rent was $1,390 in 2005, predicted to rise an additional 6-7% in 2006.
Inland Empire rents, which had a monthly average of $1,012 at the end
of 2005, should rise about 5% in 2006.
“These statistics show that the market will inevitably sustain a
high demand for apartments,” noted Dr. Stephen D. Cauley, associate
director of research for the Ziman Center.
The most recent Quarterly Survey of Apartment Market Conditions by the
National Multi Housing Council, a group that represents apartment owners,
developers, managers and financiers found that 70% of respondents reported
improved demand for apartments, measured by lower vacancy rates, higher
rents or both.
Not particularly enlightening conclusions when you realize that Los Angeles
County has had a rental shortfall of 25,000 units per year for the past
several years. The USC Lusk Center for Real Estate went further to state
that the “same dynamic of strong demand and insufficient new supply
is expected to continue.” The report further notes that Los Angeles
County leads the nation in multifamily development, with 10,900 new apartments
under construction at the end of 2005. Constrained by available land,
LA County residential projects average 57 units apiece. (Apartment projects
in Orange County average 270 units.) Downtown Los Angeles accounted for
one-third of all apartments completed in the county in 2005. Occupancy
rates downtown – now at 98.2% –will continue to be tight.
In Los Angeles County, demand for apartments will grow with the addition
of 45,000 to 60,000 new jobs in various business sectors. Rent increases
will rise as jobs continue to grow.
"The Hollywood submarket's makeover in Hancock Park, Los Feliz, Silver
Lake and Park La Brea should keep apartment demand strong this year. The
South Bay submarket is on a steady path to recovery, boosted by federal
spending and accelerated growth in global trade. The Antelope Valley continues
to be Los Angeles' most affordable submarket, with average monthly rents
of $916 per month last year," noted the Lusk report.
In Orange County, "Irvine remains a dominant submarket with the greatest
number of new apartments completed," and six new communities with
a total of 1,400 apartments are scheduled to open this year.
The average rental rate in Newport Beach is $1,892 per month, or about
33% higher than the rest of the nation. Newport Beach has not had new
apartment construction since 2002. Urban revitalization in Anaheim has
two high-end projects bringing about 500 new units to market this year.
In Buena Park, "occupancy remains extremely tight so further rent
increases are expected."
The Inland Empire is predicted to see steady, moderate rent increases
with almost 6,000 new units opening in 2006. The trade-based submarkets
near Ontario Airport will continue to grow, and the Lusk reported named
the entire region “California's fastest-growing urban area over
the next 10 years."
Harvard University's Joint Center for Housing Studies has concluded that
in 2004 an estimated 29.6% of the 106.4 million U.S. households spent
30% or more of their total income on housing, compared with about 28.2%
of households in 1997; and 13.4% of U.S. households spent at least half
of their income on housing in 2001 compared with 12.8% in 1997.
Approximately 13% of Los Angeles residents can afford to purchase a median-priced
single-family home. Currently, the home ownership rate in the Los Angeles
area is about 40 percent, compared to the national average of about 70
“Even with record-level single-family home sales, demand for apartment
residences by individuals and families continues to strengthen virtually
across the board,” noted National Multi Housing Council’s
NMHC Chief Economist Mark Obrinsky. “If the homeownership market
should start to cool, demand for apartments could rise even further.”
The Real Estate Research Corporation notes that investors are looking
for an average 10% internal rate of return on multifamily rental properties,
but have been settling on going-in capitalization rates averaging 7.8%
with multifamily rental properties.
"Our analysis strongly suggests that increases in long-term interest
rates will be followed by corresponding increases in cap rates, although
they will lag somewhat," concluded Dr. Cauley of the Ziman Center.
“If increases in interest rates occur at historical levels over
the next three to four years, declines in apartment values and market
disruptions should be relatively small. If, however, interest rates should
escalate quickly due to such events as increased inflation or major oil
disruptions, the impact on the markets could be significant with substantial
declines from the current record highs in the real value of apartments."
For more on Southern California commercial properties there is a great
information blog at www.socalindustrialrealestateblog.com.