Living La Vida Local
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Estate and the Casden Real Estate Economics Forecast.

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 percent.

“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.