Despite a substantial increase in multifamily construction, the 2016 USC Casden Multifamily Forecast finds that higher demand for apartments across Southern California will keep vacancies low and drive significant rent increases over the next two years.
“Local supply constraints combined with solid economic growth implies that the softening will not be experienced locally.”
The forecast, which is produced annually by the University of Southern California Lusk Center for Real Estate and prepared this year by Beacon Economics, offers detailed analysis of the 52 submarkets that comprise four regional markets and two-year projections for each market’s average rent and vacancy rate.
Despite construction permits being issued for more than 38,000 new units across the four regional markets in 2015 – the highest since before the recession – vacancy rates are projected to continue their gradual decline through 2018. As a result, average rents are expected to increase over their 2015 levels by $109 in Los Angeles County, $149 in Orange County, $84 in the Inland Empire and a whopping $155 in San Diego County by 2018.
“Though multifamily construction permits are back to pre-recession levels and have provided some relief, population and employment growth are driving up demand faster than new inventory can hit the market. For renters, new construction has simply kept a bad situation from getting drastically worse,” said Raphael Bostic, interim director of the USC Lusk Center for Real Estate.
While the forecast suggests that the national rental housing bull market is beginning to wane as improving employment and thawing credit markets drive up homeownership, it details a very different situation in California.
The state’s home prices are twice the national average and regulatory controls – notably the California Environmental Quality Act (CEQA) and Proposition 13 – have combined with faster-than-average population growth to constrict the housing supply. As a result, California is home to 13 percent of the nation’s population, but only 8 percent of residential building permits.
“At a national level, it is clear that the great apartment bull market that started at the end of the great recession is coming to an end,” said Christopher Thornberg, Beacon Economics founding partner. “Local supply constraints combined with solid economic growth implies that the softening will not be experienced locally."
In addition, Bostic notes that most multifamily construction in Southern California – particularly in Los Angeles and Orange counties – currently targets higher income renters and does little to control rent.
“While new inventory tends to favor higher incomes and more affluent neighborhoods, there is hope for other classes of renters,” Bostic said. “High-end renters are the first to become homebuyers. As the demand for high-end dwellings slows, savvy developers will seek more projects built for people of more modest means.”
The forecast provides the following outlook for each region:
LOS ANGELES COUNTY
In 2015, LA County had an average rent of $1307, a $59 increase over 2014, and a relatively flat vacancy rate of 4.2 percent. At the same time, construction permits were issued for 17,869 rental units, an 18 percent increase from 2014 and well above pre-recession levels. The county saw significant population growth and was home to one-fifth of the state’s new jobs, which pushed more Millennials into the rental market. While new inventory will combine with increased demand to keep vacancy rates near their current levels, rents will continue to soar.
2018 Forecast: 4.1 percent and $1,416 average rent.
ORANGE COUNTY
With the region’s top-performing economy, Orange County remained the most expensive rental market in 2015 with an average rent of $1,587, an $81 increase over 2014, and a 4.4 percent vacancy rate. Though multifamily construction permits increased 16 percent to 8,581 new units in 2015, job gains and population increases – combined with the high price of homeownership – will continue to produce higher rents and low vacancy rates over the next two years.
2018 Forecast: 3.8 percent vacancy rate and $1,736 average rent.
INLAND EMPIRE
With its lowest unemployment rate in eight years, the Inland Empire (Riverside and San Bernardino counties) saw average rents increase 5.2 percent to $1,155 in 2015, while vacancies continued a gradual decline to 7.5 percent. The strength of transportation and logistics, the region’s signature industry, will continue to propel both job and population growth over the next two years. The only market to experience a decrease in construction – 2,680 units permitted in 2015 versus 2,907 in 2014, rents will gradually increase while vacancies continue to fall through 2018.
2018 Forecast: 7 percent vacancy rate and $1,239 average rent.
SAN DIEGO COUNTY
Driven by sound economic fundamentals, including its lowest unemployment rate since 2007, the San Diego County housing market will continue to heat up over the next two years. While rents increased 5.9 percent to an average of $1,422 in 2015, a recent sharp increase in construction caused the vacancy rate to increase from 4.6 percent in 2014 to 4.9 percent last year. Though construction permits were issued for 6,273 units in 2015, the most since 2005, population growth and continued economic strength will produce the region’s highest rent increases over the next two years.
2018 Forecast: 4.8 percent vacancy rate and $1,577 average rent.
The 36-page report was produced by Bostic and prepared by a three-person Beacon Economics research team that included Thornberg; Robert Kleinhenz, executive director of research; and Rafael De Anda, research project manager.
The complete 2016 USC Casden Multifamily Forecast, which contains additional analysis and projections for all 52 submarkets that comprise the four larger markets in Southern California, was presented to a gathering of hundreds of industry professionals in Los Angeles on April 12. It will be made available to the public on Thursday, April 14 at http://lusk.usc.edu/casden.