September 08, 2004
UCLA Ziman Center For Real Estate Forecasts Continued Strength For Southern California Apartments
Longer Term Prospects Tied Directly to Interest Rates
LOS ANGELES, Sept. 8, 2004 — The Southern California apartment markets should continue to perform well with increased occupancy rates and rental growth driving higher per-unit prices and keeping cap rates at extraordinarily low levels. These projections are part of the annual forecast presented by the Richard S. Ziman Center for Real Estate at UCLA Anderson School of Management at its Sixth Annual Southern California Multi-Family Housing Conference held today at the Skirball Cultural Center.
According to Dr. Stephen D. Cauley, the Ziman Center’s associate director of research, the current level of cap rates is explainable by recent declines in long-term interest rates. “Our analysis strongly suggests that increases in long-term interest rates will be followed by corresponding increases in cap rates, although they will lag somewhat,” said Dr. Cauley. “If increases in interest rates occur at historical levels over the next three to four years, declines in apartment values and market disruptions should be relatively small. If, however, interest rates should escalate quickly due to such events as increased inflation or major oil disruptions, the impact on the markets could be significant with substantial declines from the current record highs in the real value of apartments.”
The Ziman Center forecast notes that Southern California is in a sustained growth period for apartment demand. Currently, only 18% of Californians can afford the medium priced single family home, which Dr. Cauley believes will inevitably maintain the demand for apartments. Because of this demand and constraints on supply of new apartments, he projects substantial rent increases (2-3% above inflation) and low vacancy rates for the foreseeable future.
The supply issues cited in the Ziman Forecast Center forecast include strong Chinese demand for concrete, steel and lumber, increasing the cost and decreasing the availability of these resources for U.S. consumption. Also factoring into the supply-demand imbalance are major barriers to entry in urban areas, including entitlement limitations. Dr. Cauley points out that there is also a current imbalance between the location of newly constructed apartments and the greatest need for those units.
“We believe that major construction of Southern California apartments will take place in areas like the Inland Empire and Palmdale in northern Los Angeles County, while the greatest need for these living units remains in the urban core,” said Cauley.
The Ziman Center forecast cites northern San Diego County as perhaps the strongest apartment market in Southern California, supported by increases in young, highly educated professionals drawn to the area by the biotech and defense industries. Orange County will also benefit from this employment and demographic trend, as will parts of northern Los Angeles County, but to a lesser extent than in San Diego. The Inland Empire will be the only area to see the development of a considerable number of “moderate income apartments” that will be built without any subsidies. However, rapid growth and elastic supply will limit rent growth in the area, Dr. Cauley believes.
About The Richard S. Ziman Center for Real Estate
Since its inception in 1999, the primary objective of the Richard S. Ziman Center for Real Estate at UCLA Anderson School of Management has been to provide the real estate community with leading economic and demographic research, including an annual multi-family housing forecast that provides a quantitative and qualitative overview of the Los Angeles apartment market. Conferences held by the Ziman Center bridge the divide between research and practice, providing participants with strategies and information on which to base critical policy and business decisions.
Philip Little, (310) 825-9983