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10/18/18
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This report was provided by USC Lusk Center
The 2018 University of Southern California Casden Economics Forecast leaves little doubt that the affordable housing crisis is not exclusive to low-income households. In fact, this year’s report unveils a new assessment model that sorts every unit by monthly rent and every renter by monthly income, ultimately matching the two numbers together.
The results are startling. A household income at the 25th percentile would spend 58% of its income to live in its counterpart on the rental side. Likewise, the incomes at the median and 75th percentile cannot afford rents at the same percentile. Even under this best case standard, few units in Southern California are affordable.
“There is a poor match between people’s housing cost and incomes right now, and no amount of sorting will, by itself, fix this issue,” said Richard Green, director of the USC Lusk Center, who co-authored the study. “One of the striking results we found is that where vacancy has increased slightly, there is a relief in rental increases. The way to raise vacancy rates is to build more.”
The forecast, which is produced annually by the USC Lusk Center for Real Estate in partnership with Beacon Economics, finds that by 2020, average monthly rents are expected to increase over their 2018 levels by $91 in Los Angeles County, $52 in Orange County, $209 in San Diego County, $107 in Ventura County and $78 in the Inland Empire.
The forecast provides insights into how single-family construction remains at particularly low levels, while multifamily construction, in absolute terms, is at about average levels. These trends persist at the same time the U.S. housing stock continues to age. Vacancy remains well below natural vacancy rates, the rates at which real rents neither rise nor fall. A concern facing the rental market is the possibility of rising capitalization rates, owing to rising interest rates and slower rent growth. This means that multifamily property values may fall a bit in the next few years.
The annual forecast, which assesses current and projected multifamily rents and vacancies in submarkets across five regions – Los Angeles, Orange, San Diego and Ventura counties, and the Inland Empire, provides the following outlook for each region:
LOS ANGELES COUNTY
Los Angeles County continued to see steady growth while effectively at full employment. There were 3.3 million occupied housing units in Los Angeles County in 2017, with 1.8 million being renter occupied, making it the only Southern California region with more renters than homeowners. With a 44.8% increase in multifamily permits through the first half of 2018, Los Angeles County will see yet another much needed gain in its multifamily housing stock.
2018 Levels: $2,267 average rent; 3.95 percent vacancy rate
2020 Forecast: $2,358 average rent; 4.31 percent vacancy rate
ORANGE COUNTY
The homeownership rate in Orange County has historically been higher than in other nearby counties. Additionally, Orange County has the highest vacancy rate among all Southern California metro markets, due in large part to several years of elevated multifamily construction levels. With population growth and income gains continuing and the pace of construction slowing, the market will continue to be tight and rents will trend upward.
2018 Levels: $2,035 average rent; 4.14 percent vacancy rate
2020 Forecast: $2,087 average rent; 4.56 percent vacancy rate
SAN DIEGO COUNTY
San Diego County’s economy has grown strongly in recent years, with job growth until this year, ranging between two and three percent annually. For the metro area as a whole, the vacancy rate in 2018 remains unchanged at 3.9% from the year prior. San Diego County can expect continuous economic and population growth over the foreseeable future. The economy’s leading sectors will continue to draw a variety of workers. Additionally, the region is perennially attractive to older members of the population, including retirees. In turn, there will be continued housing demand in both the renter and owner-occupied markets, and rents will continue to increase as vacancy rates remain low.
2018 Levels: $1,978 average rent; 3.94 percent vacancy rate
2020 Forecast: $2,187 average rent; 3.75 percent vacancy rate
VENTURA COUNTY
Ventura County is the smallest of all Southern California’s counties in our study. Its economy has generally grown more slowly than other parts of the region, due in part to a labor force that has actually declined marginally every year since 2012. Following a sharp increase in multifamily construction in 2016 and 2017, the number of permits issued in 2018 fell back, totaling a tiny 360 in the first half of 2018, a significant decline from 854 the first half of 2017. Still, the number of permits issued in Ventura County is generally much lower than elsewhere in South California. This is partly because of the small population base, but also because the county favors slow growth.
2018 Levels: $1,983 average rent; 3.91 percent vacancy rate
2020 Forecast: $2,090 average rent; 3.85 percent vacancy rate
INLAND EMPIRE
The Inland Empire has been Southern California’s fastest growing economy for several years. Economic growth is projected to continue and will bring sizable population increases and a demand for rental housing. Average monthly rent and rent growth are also among the lowest of all Southern California counties. However, multifamily and single-family permits have decreased in the first half of 2018. The rental market is expected to remain tight as the lack of affordability in Los Angeles and Orange counties will continue to attract both buyers and renters to Riverside and San Bernardino counties.
2018 Levels: $1,457 average rent; 3.84 percent vacancy rate
2020 Forecast: $1,535 average rent; 3.68 percent vacancy rate
The 59-page report was produced by the USC Lusk Center for Real Estate and prepared by Green and a four-person Beacon Economics research team that included: Christopher Thornberg, founding partner; Robert Kleinhenz, executive director of research; Adam Fowler, research manager; and Justin Niakamal, senior research associate.
The complete 2018 USC Casden Real Estate Economics Forecast, which contains additional analysis and projections for the dozens of submarkets that comprise the five larger markets in Southern California, was presented to a gathering of hundreds of industry professionals in Los Angeles on October 17, 2018.
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