September 20, 2002

Ziman Center for Real Estate at UCLA Anderson Predicts Favorable Long-Term Investment Outlook in Its First Southern California-Wide Multi-Family Housing Forecast

Los Angeles — Economists with UCLA Anderson's Richard S. Ziman Center for Real Estate released their first forecast for the entire Southern California area on Sept. 18, 2002, anticipating positive prolonged investment opportunity for the region’s apartment building markets. The forecasts for prior conferences covered only the Greater Los Angeles area.

The predictions were presented by Dr. Stephen Day Cauley, associate director of the Ziman Center, as a part of the Fourth Annual Multi-Family Housing Conference held at the Skirball Center. In addition, the conference included keynote addresses on urban revival by Jerry Brown, mayor of Oakland, Calif., and Richard Banks, president of the west division of Archstone-Smith, who spoke on current market possibilities. Panel sessions and workshops on related topics were also presented.

The expanded Southern California forecast noted that apartments have experienced a 15 percent increase in per unit prices during the past year, even though this was a period of only moderate growth in rents and declines in occupancy rates, giving rise to fears of a possible “price bubble.” However, though some submarkets are almost certainly over-heated, Cauley believes the majority of apartment buildings are not substantially over-valued because of advantageous long-range demographic trends.

“We are in a period of sustained growth in the part of the population that demands apartments,” Cauley said. “There is an increasing portion of the population who will never be able to afford home ownership, mainly low income recent immigrant families.”

In addition to these lower income families, the report anticipates an increase in the population of young, highly educated professionals, another source of demand for apartments. However, because of an imbalance between location of new construction and location of greatest increase in demand for apartments, the needs of the young professionals group will be met, but the needs of the lower middle class will not.

The forecast expects substantial rent increases of two to three percent real growth and low vacancy rates for the foreseeable future in the Southern California region as a whole. However, some higher-end areas, like West Los Angeles, are not as likely to prosper, experiencing decreases in occupancy rates and possible reductions in average rents. Conversely, San Diego County, especially I-5 and I-15 corridors, should be “hot.”

In the short-run, the still slow economy should dampen all segments of the market. The foremost risk is the potential for the prior year’s price increases resulting in unrealistic expectation of future price increases, triggering “money chasing deals” and potential formation of a “price bubble.” Los Angeles County is most vulnerable to negative impact from this irrational response.

“The biggest threat to Southern California apartment markets is a rise in property values that is not consistent with economic fundamentals,” said Cauley. “Fundamentals are consistent with continued growth in real property values and development opportunities, but not consistent with continued double digit price increases.”

Cauley noted that there are limiting factors at work, including the effect of rent increases on labor costs that reduces the rate of employment growth and decreases demand for apartments locally, as well as the negative effect of rent increases on immigration into and out of Southern California.

“Firms are chasing people — not moving where their customers are but where employees are available,” said Cauley. “If rents are too high, people leave.”

In addition, the predictions are based on an expected benign state in the economy, absent a “double dip” recession, which Cauley and his staff think can be avoided. Other risks that could materially worsen the prognosis include a 7000 Dow, adverse impacts of terrorism — especially from a war with Iraq, or an oil price shock triggered by a blow-up in the Middle East.

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