September 13, 2001

Los Angeles — A UCLA multi-family housing forecast for Los Angeles County predicts that the apartment market will experience slower growth for the rest of 2001, mirroring the slowdown that is affecting all segments of the economy. But the long-term investment outlook is bullish for local apartment buildings as rents are likely to continue increasing, according to the report presented today by UCLA Anderson.

In the short run, the multi-family housing market in Los Angeles County will see slower but still substantial rent growth, small increases in capitalization rates and slower price appreciation, predicts Stephen Cauley, associate director of UCLA Anderson's Richard S. Ziman Center for Real Estate and a lecturer in real estate investment.

"We're predicting slower growth and price appreciation but we're still in positive territory," Cauley said. "This is an optimistic forecast based on the current economic slowdown continuing at about the same pace for the remainder of the year. However, if we have a more substantial economic slowdown, all bets are off."

Projections show that the price-per-unit for a typical Los Angeles County apartment has slowed from an 11.1 percent increase in 2001 to a projected 4.6 percent increase by 2002.

In addition to the economic slowdown, factors that limit property appreciation include a "feedback" effect created by changes in the labor market, as well as by changes in the number of immigrants coming to or leaving Los Angeles, Cauley said.

In looking at the demographic factors driving the demand for apartment units, Cauley said the dramatic rise of the Latino population will have a large effect on the rental market. The largest increase of renters is among the Hispanic population in Los Angeles. By the year 2005, nearly 50 percent of Los Angeles County residents will be Hispanic, compared to 26 percent whites. Nearly 10 percent of renters are African American and close to 15 percent are Asian.

"The growth of Latino renters is where the action is in terms of the Los Angeles County apartment market," Cauley said. "This is an area where demand for apartments is going to grow in proportional amounts, represented through rents and building prices." Latino areas such as East Los Angeles and the northeast San Fernando Valley are among the areas with the biggest population growth and thus the biggest demand for housing.

Demand for apartments also is driven by the increasing bifurcation of income levels in Los Angeles County. An increasing portion of the population will never be able to afford homeownership, Cauley said. As this segment of the population continues to increase, the region will see a long period of sustained growth in demand for apartments.

In his presentation, Cauley also points to an imbalance between the location of new construction and areas with the greatest increases in demand.

Despite the current slowdown, Cauley is still bullish about the multi-family housing market in the long run, as high single or low double-digit rents increases are predicted for the foreseeable future. However, he cautioned that the market would suffer in the event of such circumstances as the stock market falling to 7,000, a major oil price shock, or political response to the affordable housing crisis.

Cauley made his predictions as part of the third annual Multi-Family Housing Forecast Conference, conducted by the Ziman Center at UCLA Anderson's Korn Convocation Hall. The conference brings together research and practice, providing participants with the latest information upon which to base critical business decisions. Speakers and panelists included industry, community and government leaders, and academics, who examine opportunities for those who own, build, develop, manage or invest in multi-family housing.

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