More apartments are coming.
A surge of multifamily construction powered better-than-expected gains in home building in September, according to new figures out Friday. The Census Bureau said housing starts climbed 6.3% from August, and through the first nine months of the year are running 9.5% ahead of 2013's pace.
Nearly all the gains have come in buildings with five or more units, mostly apartments being built for a fast-growing population of renters. So far this year, there have been more than twice as many apartment units started as single-family homes, both in the Southland and nationwide, and in the last three months, multifamily housing starts have climbed to their highest level in 14 years.
The reason is pretty simple, said Jed Kolko, chief economist at real estate website Trulia.
"That's where demand is," he said. "Nearly all of new household formation right now is renters. Young people are starting to move out of their parents' homes, and both young and older adults are having a hard time buying houses."
But the increase in supply won't be enough to keep pace with the growing demand, economists say. That means rents will continue to rise, making it tougher to afford housing in the metro Los Angeles area where more than half of all households rent instead of own.
Despite all the new construction, average rents across the Southland are projected to grow 8% over the next two years, according to a forecast released last week by USC's Lusk Center for Real Estate, a pace faster than last year's. In a market in which apartment vacancy rates hover around 3%, it's hard to build fast enough to push rents down, said Raphael Bostic, a public policy professor at USC.
"There's so much excess demand," he said at a panel discussing the forecast last week. "Prices will just stay where they are."
That dynamic is playing out in downtown Los Angeles, where more than 6,000 new apartment units are in development, according to figures from real estate brokerage Marcus & Millichap, yet average rents keep climbing. Many of the new buildings are at the market's high end. For instance, the Ava in Little Tokyo charges $2,200 for a one-bedroom unit; at the Emerson on Bunker Hill, which is aiming for an older audience, one-bedroom units start around $3,500.
It's also at work in other neighborhoods where job growth is strong. In Santa Monica, for instance, the rental market is soaring thanks to affluent young tech workers who are willing to pay extra to live near both the office and the beach.
"Things here are just going up and up," said Kevin Miller, president of listing agency Westside Rentals. "We've had our best year ever in terms of volume."
Kolko and other economists expect that will continue for a while, as 20-somethings get better jobs and move out on their own. When they do, they'll head first for apartments.
"For many it will be years before they're buying single-family homes," Kolko said.
That is damping enthusiasm, though, on the larger single-family side of the building industry.
So far this year, starts on single-family homes are just 3.8% ahead of 2013's relatively slow clip, and they sit well below the pace set in the heyday of the mid-2000s.
A key index of home builder confidence fell last month, an industry trade group said. And builders, concerned about credit and buyer demand, have been hesitant to leap into new subdivisions.
That's not likely to change soon, said Lindsey Piegza, chief economist at Stern Agee in Chicago.
"We appear to be little changed from levels at the start of the year, suggesting stabilization at best in housing," she wrote in a research note. "Uneven demand is likely to keep home builders cautious for some time."