Rents projected to rise in southern California

Southern California’s strong economy, continued immigration and a shortage of new units will drive up the region’s apartment rents an average 6 to 8 percent over the next two years, according to the Casden Real Estate Economics Forecast released today by the University of Southern California Lusk Center for Real Estate.

In 2003, monthly rents averaged $1,300 in Los Angeles County, $1,260 in Orange County and $900 in Riverside and San Bernardino counties.

“We’ll continue to see strong demand from tenants moving into southern California, especially from young singles wanting efficiency units and larger Latino immigrant families needing three-bedroom apartments,” said Raphael Bostic, Ph.D., director of the Casden Forecast. “The big problem is that there are just too few units available for people to move into right now. Cities need to be more aggressive about allowing higher-density projects in urban areas, but unfortunately, neighbors often reject this approach.”

The Casden Forecast analyzes apartment transactions, new building permits, leasing activity and employment data to produce forecasts of rent and vacancy levels in Los Angeles County, Orange County and the Inland Empire.

Although Los Angeles County is expected to have slow economic growth over the next two years, a lack of supply coupled with continued strong demand means rents will continue their inexorable rise. Rents are expected to increase slightly less than 6 percent in 2004, followed by a 7 percent jump in 2005 when average rents will increase to $1,400/month. “Consistent with the mismatch between household size and types of units being built, three-bedroom apartments will become precious over the next two years with rents for this type of unit approaching $2,400/month by the end of 2005,” Bostic said. Submarkets with significant populations of immigrants and lower-income renters, such as East Los Angeles, the San Gabriel Valley, Long Beach and Central Los Angeles, will see higher occupancy and strong rent growth through 2005. In contrast, the expensive West Los Angeles apartment market, which was impacted by a loss of technology jobs in 2001, will not see rents rise again until early 2005.

Orange County’s economic and job growth will accelerate through 2005, driven by the expansion of its key technology, engineering and communications sectors Likewise, the county’s apartment market will continue to grow, driving occupancy rates to nearly 97 percent by year-end 2005. This year, rent growth of 6 percent will be the norm. In 2005, it will average 9 percent – one of the highest growth rates in the nation. Given its strong growth outlook, the county will remain an attractive market for apartment owners, developers and investors. The submarkets of Newport Beach, Irvine and Mission Viejo will particularly benefit from the county’s rising growth. Two of the most affordable submarkets – Anaheim and Santa Ana – will remain strong, as newly created jobs coupled with ongoing immigration increase pressures on rents.

In 2004, as in the previous five years, the economies of Riverside and San Bernardino counties will outperform those of L.A. and Orange counties. Despite a large number of new units coming on the market over the next two years, occupancy will hover around 97 percent as a continued influx of new trade-related jobs brings even more workers to the region. The Inland Empire’s strong economy will drive up rents 8 to 8.5 percent over the next two years, and the region’s average rents for the first time will reach $1,000/month. Three-bedroom units could climb to $1,400/month by the end of next year. In the Riverside/Corona/Moreno Valley and Southwest Riverside County submarkets, rents will soar by 10 percent annually over the next two years, thanks to the proximity of large job markets in Los Angeles and Orange Counties.