The high price of homes and a limited supply of new apartments will lead to “substantial rent increases” and low vacancy rates in Southern California, according to a forecast by the Richard S. Ziman Center for Real Estate at the University of California, Los Angeles, Anderson School of Management.

The Ziman Center forecast notes that 18 percent of Californians can now afford the median-priced single family home; this will inevitably sustain a high demand for apartments, said Stephen D. Cauley, associate director of research for the Ziman Center. Cauley said in an announcement today that he projects rent increases of 2 percent to 3 percent above inflation.

Also, Cauley said that the areas where new apartments are being built are not the areas of greatest demand. “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,” Cauley said.

Apartment supply issues cited in the Ziman Center Multi-Family Housing 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.

San Diego County is perhaps the strongest apartment market in Southern California, according to the forecast, as it is 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, according to Cauley.

“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 forecast was released today during a conference at the Skirball Cultural Center in Los Angeles that features discussions among Los Angeles mayoral candidates and presentations by real estate industry professionals. Constance Moore, president and CEO of BRE Properties; Angelo R. Mozilo, chairman & CEO of Countrywide Financial Corp.; Gerald S. Brand, senior vice president of Fairfield Residential; Kate Bartolo, senior vice president/development of The Kor Group; and W. William Gaboury, president & CEO of Shea Properties, were scheduled to participate in the conference.


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