For owners and operators of multifamily buildings across the country, the future isn’t looking as promising as it has over the last few years. That’s not to say it’s looking bad; there is still high demand, particularly in booming urban areas, but the bullishness of the market is slowing down. Experts predict a general loosening over the next half-decade. The profitability of the market led to excess growth and higher vacancy rates, and a stabilized economy means more people moving into homes, lowering demand.
That’s not the case everywhere in the country, though. Some cities, like Austin and Chicago, are still seeing rising rates and new growth. But there are very few areas where a bull market remains as strong as it does in Southern California. In nearly every region—Orange County, Los Angeles, San Diego, and the Inland Empire—forecasts for growth remain strong. Demographics and economics will continue to produce high demand for multifamily housing even as growth continues. Southern California trendlines will make multifamily a profitable market for the near future.
Highlighting Southern California’s Multifamily Market
Let’s take a look at some numbers, courtesy of NAI Capital’s Multifamily report :
- Los Angeles County: Average unit rental rate, $1647, up 5.2% over last year
- Orange County: Average unit rental rate, $1770, up 3.6% over last year
- Inland Empire: Average unit rental rate, $1204, up 2.9% over last year.
Other estimates forecast even more growth throughout 2016 when you focus on smaller areas. The Riverside-San Bernardino-Ontario, the San Diego-Carlsbad, and the Los Angeles-Long Beach-Glendale metropolitan markets all have a forecast growth of over 6%, 50% more than the national average. The Los Angeles Business Review forecasts rent growth in LA County through at least 2018.
All of this is in spite of the continued building boom. In Los Angeles County, multifamily housing permits are expected to reach nearly 17,000, which is more than even the pre-crash high. Orange County has, proportionally, seen even higher growth. Their permit applications are expected to reach over 7500; even in the peak pre-crash years of 2003-2007 they never topped 5000. Neither Inland Empire nor San Diego is seeing as much growth, but both are on an upward swing.
Even with this growth, vacancy rates continue to remain tight. The national average for occupancy is 94%. In Southern California, we see occupancy rates at:
- Los-Angeles-Long Beach-Glendale: 96.3%
- Anaheim-Santa Ana-Irvine: 95.8%
- San Diego-Carlsbad: 95.7%
- Riverside-San Bernardino-Ontario: 95.4%
All four of these regions have vacancy rates that are expected to stay steady, or even decline. It’s rare to see permit growth rise and vacancy decline, but Southern California’s multifamily market is pretty unique in that regard.
What Pushes Southern California Against the Trend
So then the question is: why? Why is this area pushing against the trend, where construction can increase without a loosening of rents? What keeps the market tight and profitable? There’s been a combination of factors, all starting with jobs.
- Employment rates rising. Southern California, particularly Los Angeles and the Inland Empire, was pummeled by the Great Recession, both in terms of foreclosures and job losses. But employment rates keep rising. California as a whole has outpaced the rest of the nation in job growth, and while Southern California is still slightly behind in terms of total employment, its relative growth has been even more impressive, leading to more jobs, more people moving in, and more people looking for rental properties.
- Millennials moving out. Millennials were unfairly maligned for being a generation that stayed with their parents and got a late start in life. They entered adulthood during a financial calamity; it was hard to blame them. Indeed, they should have been praised for being cautious. But now that they are entering the market, they are making a huge difference. However, they aren’t yet ready to buy, and many of them can’t afford to live alone. In San Diego County, only 10% of people aged 24-34 live by themselves. In Los Angeles, that’s down to 8.4%, and Riverside is at only 6.1%. This is a “renting with roomies” generation, and it is why the multifamily market continues to grow.
- Tech jobs. There’s no question that tech is what has made the San Francisco housing market so historically tight. A result of that is that companies, and then employees, moved south. The LA tech market is booming, with major companies opening up auxiliary headquarters, and the startup scene exploding. This sector is looking for units near the ocean and the airport, which is why certain underdeveloped areas are now becoming very profitable.
- Ancillary tech jobs. More tech jobs mean more restaurants, retail, and other service sector jobs. This means more employment, and more people looking for homes. In addition to that, the shipping and logistics side of tech has helped spur job growth in the Inland Empire, which is a perfect area to join overseas with the rest of America. Warehouse and factories are growing, attracting workers from all over the country, who will be in need of affordable and comfortable housing.
So that’s the why of it. Let’s look at a few case studies to see this in action.
Case Study 1: La Jolla
The Village of La Jolla, the enclave of La Jolla—whatever you want to call this San Diego neighborhood— is a unique SoCal institution. Known for its beach life and fine shops, La Jolla has been working to accommodate new residents as the rest of San Diego continues to grow. San Diego has worked to become a neighborhood-based hub-oriented city, making it full of transportation-centric mini-cities. Its geographic limitations (bordered by the ocean, a fine limitation if we’ve ever heard of one) have left La Jolla slightly behind. That’s changing. New projects are being approved, including a “two-story 7,875 square-foot mixed-use building, a 3,820 square-foot two-story residential building and a 3,086 square-foot three-story residential building with a 15,312 square-foot underground parking garage at 6738 La Jolla Blvd. and 350 Playa Del Sur,” in place of an old Su Casa building. This massive project, approved in January, is set to break ground this fall, and will transform a vital part of the city, making it more pedestrian-friendly and growth-oriented. It’s this kind of growth that is attracting new residents, even while maintaining a steady rent and occupancy growth.
Case Study #2: Glassell Park
A diverse Los Angeles neighborhood hard against the river, Glassell Park isn’t what one immediately thinks of when discussing growth. But Glassell Park is bordering the Burbank-Glendale axis, and those neighborhoods have been growing quite a bit. Rent is at a steady 4% growth, but its vacancy rates are among the lowest in the region. Currently under 3%, they are expected to drop under 2% in the next two years. This opens up opportunities for builders and renovators in the area, and in late August, it was announced that a private equities group purchased a “5.6-acre site there for $22 million with plans to build a 400-unit apartment complex.” This will be right along the Los Angeles river, in an industrial area, but one with a lot of potential. It is one of the few areas on the river that still has greenery and natural growth, and can be transformed into a beautiful spot, attracting people who moved to the city and are looking for something nice and new. Growth in the more well-known spots means potential growth in neighboring areas, which is where smart investors should be looking.
Case Study #3: Beverly Hills-Coastal Communities
In a tech boom, certain neighborhoods flourish more than others. The Beverly Hills and the Coastal Communities are where all the youngish tech professionals want to live. It isn’t that this was a struggling area beforehand, but now it is exploding, with rents expecting to hit close to $1900 (on average) a month by 2018, with 98% occupancy. Developers and renovators can look to build here, as well as neighborhoods outside of it. Downtown LA might be the next growth spot.
It is important not just to look at this neighborhood itself, but to use the Los Angeles experience with the tech boom as an example of the transformative power of the industry. Once tech companies began to plant roots, it was fairly easy to see that these neighborhoods would be popular. Follow the movement of high-growth industries, especially as they spread throughout Orange County or San Diego, and plan your next move around that.
It’s an exciting time in the Southern California multifamily market. We expect to outpace the rest of the slackening US industry and expect to do so for at least the next several years. There’s a lot that makes this area unique: great weather, an exciting and diverse population, a mixture of old and new. And now you can add a still-growing and expectation-defying multifamily market to that list.