Trends Point to a Hotter L.A. Apartment Market, Experts Say
The superheated Los Angeles apartment market is drawing investors from all over the U.S. as this region’s growing population, sound economy and lack of new construction suggest that values of apartment buildings will continue to rise both in the near future and for the long term.
It all boils down to supply and demand, according to speakers at a conference last week sponsored by UCLA’s Anderson School of Business and real estate firm CB Richard Ellis. The speakers said L.A. County’s steadily rising demand for apartments and the lack of new construction will continue to drive up rents, in turn driving up prices paid for apartment buildings. Barring government action such as rent controls or a catastrophic economic event such as a stock market crash or a severe recession, they said, apartments would appear to be a sound investment for years to come.
“Not a week goes by that I don’t get scores of calls from investors all around the country,” said Russ Dixon, senior managing director of multi-housing properties at CB Richard Ellis in San Diego. Dixon said those investors are providing capital that supplements the already substantial base of local investment dollars for the apartment market.
UCLA forecaster Tom Lieser cited Construction Industry Research Board figures showing that only 4,805 permits for multifamily housing were issued in Los Angeles County in 1998, compared with the tens of thousands per year that were the norm in the heyday of apartment building in the 1970s and 1980s. CIRB figures show that nearly 53,000 multifamily permits were issued in L.A. County in 1986, the peak year. After that, the number tailed off gradually to a low of just fewer than 3,000 permits in 1993.
L.A. County accounted for just 15.4% of the multifamily permits issued in California during 1998, Lieser pointed out, yet at 9.8 million residents, L.A. County has nearly 30% of the California population of 33.5 million. What’s more, new apartment construction in California, Lieser noted, is “disproportionately low relative to the rest of the nation.”
That trend, combined with the region’s increasing job base and population growth, Lieser and the other speakers said, will continue to drive the apartment market higher.
Property values and rates of return on investment will continue to vary widely in different parts of the county and in different neighborhoods, noted Steve Cauley, associate director of the Real Estate Center at UCLA.
“It is becoming a Saks-Fifth-Avenue-or-Wal-Mart world,” Cauley said. Although rents will remain high and will continue to rise in the “Saks Fifth Avenue” world of the beach areas, he said, the rate at which rents rise is likely to stabilize in the beach communities in coming years. Cauley expects demand and rent increases in percentage terms to rise most in “the blue-collar areas of East L.A. and the Northeastern San Fernando Valley,” where projections suggest population growth will be greatest.
Another factor in the apartment market is the aging of baby boomers, according to Larry Kimbell, director of real estate forecasting at UCLA. Kimbell said retirement communities for retiring boomers “might be a growth opportunity in Los Angeles” in coming years as this segment of the population, now ranging in age from 36 to 52, reaches 65 and beyond.
What are the implications for California’s real estate market and the economy as boomers age? Among the important questions, Kimbell said, are: “Can California supply young workers and mild climates at affordable prices to old boomers? Or will congestion, pollution and high housing costs drive California boomers to other states?”
Overall, Kimbell said, economic trends suggest that Los Angeles is “poised for one of the best periods in decades for real estate investment” in general and apartments in particular.
It’s relatively rare that a time is as attractive as now to invest in apartments in Los Angeles, Kimbell said.
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Rising Rents
The average rent for a premium-quality 1,000-square-foot apartment now tops $1,300. A look at some other California markets:
San Francisco: $1,912
San Jose: $1,799
Oakland: $1,388
Los Angeles County: $1,316
San Diego County: $1,151
Orange County: $1,132
Sources: CB Richard Ellis, Bureau of Labor Statistics and M/PF
