Apartments Called Good Investments

Real estate will outperform the stock market for the next few years, according to a UCLA forecast, and apartments will be especially attractive investments because of the continuing housing shortage in Southern California.

“We continue to think the stock market is seriously overvalued,” said Stephen D. Cauley, associate director of the Real Estate Center, last week at a conference at UCLA’s Anderson School. “This is going to be the decade of real estate, at least for the first part of the decade.”

While the S&P; 500 index is down more than 5% from the first of the year and Nasdaq is down 35% from its all-time high, Cauley said, research by the National Council of Real Estate Investment Fiduciaries shows that returns on real estate investments were up 11% for the United States and 13% for the Western United States from the third quarter of 1999 to the second quarter of this year.

During that same time, Cauley said, the price per unit of a typical Los Angeles County apartment building increased by more than 14%.

Rising apartment values are tied to rising rents because the prices investors pay for apartment buildings are determined by how much rental revenue the buildings generate. As long as Southern California’s economy remains prosperous, Cauley said, rents will continue to rise because job growth will create more demand for affordable apartments amid little or no increase in supply. The number of affordable apartments is not expected to increase much because of the high cost of land and regulatory limits on the number of housing units that can be built.

Cauley said the Real Estate Center projects the biggest population increases, and thus the greatest demand for apartments, in primarily Latino areas of East Los Angeles and the northeastern San Fernando Valley.

Despite the optimistic outlook for apartments as an investment, Cauley cautioned that the local economy could suffer if rents climb so high that businesses must raise wages so that workers can afford to live here. Such wage hikes could diminish the competitiveness of local firms, which in turn would limit job growth, and reduced job growth would reduce the demand for housing.

The UCLA conference also addressed the prospects for alleviating the shortage of affordable apartments in Southern California. The shortage is the result of decades of land use policies that have limited the number of housing units that can be built and discouraged the construction of apartments in many Southland communities, according to conference keynote speaker Nelson C. Rising, president and chief executive of San Francisco-based Catellus Development Corp.

Rising cited construction industry statistics showing the widening gap between housing supply and demand in California. The 154,000 housing units projected to be built in the state this year will be 30% fewer than the 220,000 units built in 1990, he said, but during those years the state’s population has increased by 15%.

“We need to change public policy” to permit higher-density housing, Rising said. The argument in favor of higher density is that it enables builders to spread the cost of a project over more units, reducing the cost per unit and allowing them to sell or rent the units at lower prices.

But Rising and other conference speakers, including Los Angeles Mayor Richard Riordan, said that persuading elected officials to allow higher density is extremely difficult in light of frequent opposition to apartments by homeowners.

“People don’t want high-density apartment complexes,” Riordan said. He said it would be “very hard, politically” to enact policy changes to allow higher density construction.