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SoCal Multifamily Markets Looking at Continued Rate Increases Due to Low Construction

11/11/22

This report was provided by The University of Southern California Lusk Center for Real Estate

Forecast authors caution that historic levels of uncertainty – inflation, interest rates and migration – might impact Los Angeles, Orange, San Diego and Ventura Counties, and the Inland Empire
The 2022 University of Southern California Casden Economics Forecast – produced during a historic confluence of economic challenges and housing market uncertainty - projects continuing rent increases over the next two years for apartment dwellers in all five Southern California housing markets.

The annual report from USC Lusk Center for Real Estate assesses current market conditions and makes two-year projections for multifamily rents and vacancies in Los Angeles, Orange, San Diego and Ventura counties, and the Inland Empire.

Longtime forecast author Richard Green, director of the Lusk Center, cautions that uncertainty about inflation, increasing interest rates, and outmigration create uncertainty for any housing forecast.

This year’s Casden Forecast combines its two-year housing projections with an examination of how interest rates, economic and monetary policies, and consumer confidence – and their role in controlling inflation – might have an impact on Southern California housing. For example, the Federal Reserve increased interest rates and signaled that more hikes are forthcoming just as the forecast was being finalized.

“The Fed has increased interest rates at a frequency not seen since the end of the Reagan administration. While it might slow inflation, rapid rate hikes could have a different impact on housing in Southern California. High interest can be barrier to new housing construction or a renter’s decision to become a homeowner. Both add stress to the rental market and drive up prices,” Green said.

In addition to inflation and interest rates, the forecast notes two other key areas -- the lack of liquidity in the stressed financial system and renters’ migration patterns driven by the pandemic.

Given the significance of these unanswered questions, Green and co-author Arnab Dutta, USC researcher and Ph.D. candidate in urban planning and development, examine each of these topics from a SoCal housing perspective. The report explores the impact of areas of uncertainty such as inflation, rapidly increasing interest rates, outmigration, and forces that hinder the delivery of new housing.

The forecast currently projects low vacancies and monthly rents increasing at least $100 over two years in all five markets. Yet, construction of new housing in each market is among the lowest levels in the U.S. on a per capita basis. The Los Angeles Metropolitan Area (which includes Orange County) is 70% more populous than both Dallas and Houston, but builds half as much housing as those cities. San Diego performs only slightly better than Los Angeles.

At the same time, the Covid-19 pandemic drove outmigration, particularly among low income households. The outmigration of low income households has led to rapid growth in per capita personal income in Los Angeles.

“Outmigrants were largely lower wage earners seeking affordability in places like the Inland Empire or Las Vegas and Phoenix, where housing is built more rapidly and rents are less expensive (although they are growing rapidly in those places as well). The big unknown is whether the outmigration trend will continue in the post-pandemic work environment.” Green said.

As a result, outmigration and other areas of uncertainty could have an unforeseen effect on the following projections and future forecast models. For now, the annual forecast provides current and projected multifamily rents and vacancies for the next eight quarters in five regions – Los Angeles, Orange, San Diego, and Ventura counties, and the Inland Empire:

LOS ANGELES COUNTY

Despite its many strengths, Los Angeles County experienced a significant level of outmigration – mostly lower wage earners – and retained or attracted higher-salaried workers. While this produced among the nation’s best growth in per capita income, the county remains among the lowest producers of new housing stock. Nevertheless, over the next two years, the county is projected to have a relatively moderate rent increase of $100/month and slightly increased vacancies.

October 2022 Levels: $2,187 average rent; 3.6% vacancy rate
October 2024 Forecast: $2,289 average rent; 4.59% vacancy rate

ORANGE COUNTY

With one of the nation’s highest household incomes – ranked 66th of 3143 counties – and only 3.0% unemployment, Orange County has a strong and diversified economy. Despite its business-friendly reputation, the market has very high housing costs for both renters and owners. This was likely a factor in some outmigration during the pandemic. Over the next two years, rent is project to increase $184 while the vacancy rate is projected to increase over a full percentage point.

October 2022 Levels: $2,597 average rent; 3.03% vacancy rate
October 2024 Forecast: $2,781 average rent; 4.36% vacancy rate

SAN DIEGO COUNTY

San Diego County is experiencing the same paradox as the other markets – outmigration is occurring in every submarket, but the vacancy rate remains very low at 2.91%. With low unemployment (3.2%) and incomes above the national average, most outmigration is among those with lower incomes. The forecast suggests that these vacancies were absorbed by households owning more than one residence. Regardless, the forecast predicts increases in both rent and vacancies over the next two years.

October 2022 Levels: $2,334 average rent; 2.91% vacancy rate
October 2024 Forecast: $2,582 average rent; 3.44% vacancy rate

VENTURA COUNTY

Ventura County is somewhat unusual for the region in two ways. First, its economy relies on mining and natural resources as an employment source, with 6% of the labor force in the sector. Though jobs in subsectors like oil extraction do not pay particularly well (about $750 per week according to the US Bureau of Labor Statistics), they do drive wealth in the region. Second, Ventura’s housing stock is stagnant. The county builds only about 70% new housing per capita compared to Los Angeles County. Accounting for new supply and removal of aging stock from the market, Ventura County nets only about 5 to 600 housing units each year.

October 2022: $2,474 average rent; 5.72% vacancy rate
October 2024 Forecast: $2,605 average rent; 5.04% vacancy rate

INLAND EMPIRE

The Inland Empire has been Southern California’s fastest growing economy for several years and produced the region’s strongest job growth as it quickly rebounded from the global financial crisis. The two counties that comprise the Inland Empire -- San Bernardino and Riverside – now have more than 1 bil sf of industrial space. The market was also a destination for outmigration, which helped drive population growth. However, like the other markets in this report, this growth was not matched by new multifamily construction. Limited vacancies and high rent – combined with relatively low income – has made housing unaffordable to many.

October 2022: $1,978 average rent; 4.26% vacancy rate
October 2024 Forecast: $2,230 average rent; 3.73% vacancy rate


About the USC Lusk Center:

The University of Southern California Lusk Center for Real Estate seeks to advance real estate knowledge, inform business practice, and address timely issues that affect the real estate industry, the urban economy, and public policy. The Lusk Center produces relevant and timely real estate research, supports educational programs for students and executives, and convenes professional forums that bring together academics, students, business executives, and community leaders.




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