Rent Increases in State Outpace Much of the West
Renters who sat out the housing boom over concerns about skyrocketing home prices are now facing an explosion of another sort: soaring monthly rents.
Rents in Los Angeles and Orange counties in the last two quarters rose at their fastest rate in five years, making them the costliest of any major market in the Western U.S., according to data to be released today.
Apartment rents are increasing more rapidly in many of California’s major markets compared with other places in the West, said Novato, Calif.-based research firm RealFacts. Blame the economy for producing more jobs, while rising interest rates and high home prices keep more people from owning.
“There will be continued demand for rental units in L.A. because of low housing affordability,” said Lane Schwartz, regional manager of the Los Angeles office of commercial property broker Marcus & Millichap.
Those dynamics are giving landlords the confidence to brazenly boost rents, analysts said. Also, the “condominium craze” among developers converting apartments into market-rate housing has reduced the supply of rental units.
“With so much focus on the housing market, everyone forgot about the rents,” said Delores Conway, a professor at USC’s Marshall School of Business who studies multifamily housing in Southern California.
Until recently, low mortgage rates and red-hot house price appreciation prompted many renters to become homeowners, keeping rents artificially low for the last few years.
Irvine Co., a land developer that also manages 80 apartment communities in Orange County and elsewhere, raised its rents this year about 6.5% over last year after a number of years of little to no changes, spokeswoman Jennifer Hieger said.
But for some renters, landlords’ efforts to play catch-up are forcing them to move.
Carlos Medina, an emergency room physician, and his wife were happy paying their rent of $2,100 a month at an Irvine Co. complex in Newport Beach. That is until they were told late last year that their rent would increase to $2,400 a month.
The rent hike, coupled with an increase in their incomes, prompted the pair to start looking to buy a house.
“Our rent went up by almost 20% after one year,” Medina said. “We no longer wanted to rent.”
The Medinas closed escrow on a home in the Woodbridge community of Irvine in May.
Kevin Saito and his sister hadn’t faced a rent increase at their Long Beach town home in six years. But this year their landlady informed them that she was tacking $1,000 a month onto their $1,500 payment.
The siblings eventually found another place nearby, albeit a smaller unit in a slightly less desirable area and for more than what they were paying.
“We didn’t have a choice,” said Saito, a college student who works part-time. “There was no way we could absorb a $1,000 increase.”
Rising rents nationwide are a key factor behind higher consumer inflation, which increased in June for the sixth straight month. Rent-based housing costs account for almost 40% of the core consumer price index, a measure that excludes energy and food costs and that is closely watched by the Federal Reserve.
Those rent-based costs jumped 0.4% in June after rising 0.6% in May, which was the most in nearly 16 years, the Labor Department reported Wednesday.
The biggest rent hikes were in California, according to RealFacts, which surveyed apartment complexes of 100 units or more in 15 Western states. The largest second-quarter increases were in San Jose, where the average monthly rent rose 9.1% to $1,414 compared with the same period a year earlier.
Not far behind were Southern California’s markets. Ventura County saw the biggest increase as its average rent rose 7.3% to $1,416, while Inland Empire rents grew 5.7% to $1,110, RealFacts said.
The Los Angeles-Orange County region topped all markets in the West for the costliest average monthly rents at $1,510. That was a 6.8% jump from the same period a year earlier, matching the first-quarter increase. Occupancy rose 0.5 of a percentage point to 95.9%, which was above average for states west of the Mississippi River, RealFacts said.
Want to live cheaper? Try Houston. Average monthly rents there rose only 2.1% to $740. In Las Vegas, they rose 5.3% to $847. The cheapest Western market tracked by RealFacts: Tulsa, Okla., at $532, flat from the year before.
Marcus & Millichap is anticipating year-over-year rent gains in the city of Los Angeles of 6% to 6.5% by year-end. “We don’t see anything that will change that,” regional manager Schwartz said.
Developers here have opted to build market-rate condominium complexes rather than apartment buildings for a better return on investments. Then there are condo conversions. In the city of Los Angeles, for example, about 11,000 apartments have become condos since 2004.
The trend may slowly be reversing. Los Angeles County leads the nation in multifamily-housing development, with 10,900 apartments under construction as of the end of 2005, USC’s Conway said. In Orange County, 1,400 apartments are slated to open this year.
But the new units won’t be enough to meet the need for rentals, Conway said.
“Demand is strong, that’s what rents being pushed up is saying,” she said. “There’s no free lunch. We all have to pay for housing in one form or another.”
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Cost of leasing
Average rents and occupancy rates for rental units in the second quarter of 2006, by county and overall in Southern California
Area: Los Angeles
Average rent: $1,559
% change from year ago: +7.0%
Occupancy rate: 95.7%
Change from year ago: +0.2
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Area: Orange
Average rent: $1,458
% change from year ago: +6.3%
Occupancy rate: 96.1%
Change from year ago: +0.9
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Area: Ventura
Average rent: $1,416
% change from year ago: +7.3%
Occupancy rate: 96.3%
Change from year ago: +1.3
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Area: San Diego
Average rent: $1,276
% change from year ago: +3.1%
Occupancy rate: 95.0%
Change from year ago: +0.6
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Area: San Bernardino
Average rent: $1,119
% change from year ago: +5.9%
Occupancy rate: 95.0%
Change from year ago: -0.4
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Area: Riverside
Average rent: $1,099
% change from year ago: +5.6%
Occupancy rate: 94.7%
Change from year ago: +1.3
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Area: Southern California
Average rent: $1,319
% change from year ago: +4.9%
Occupancy rate: 95.4%
Change from year ago: +0.5
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Source: RealFacts
