Apartment Construction Surges, So Does Demand

Housing and apartment construction this year is expected to hit the highest level in nearly a decade in Southern California, but renters still are likely to encounter stiff hikes, analysts say.

The demand for housing, spurred by a surging economy that is adding thousands of workers to regional payrolls, will continue to outpace construction. As a result, rental units will be harder to find in some areas and become unaffordable for a growing number of people.

Indeed, rents in Southern California could move up as much as 12% this year, a faster rate than prices of existing homes are expected to grow, said Craig Silvers, an analyst at Sutro & Co.

“Supply is out of equilibrium with demand,” said Ray Eldridge, a senior vice president who specializes in multifamily properties at CB Richard Ellis Inc. in Newport Beach. “Even though there’s new product coming on line, we’re still below the demand line, and we will be even further below in the future.”

The impact of the growing demand for apartments is surfacing in several areas:

* The developer of Tierra del Rey, a 170-unit luxury apartment building in Marina del Rey, boosted rents 10% above the rates originally planned. Nearly 90% of the units, which rent for $1,000 to $3,000 a month, are occupied and the rest are expected to be leased soon, said Dennis Cavallari, senior vice president of developer Legacy Partners Inc.

“You could build 30,000 units a year in Southern California,” Cavallari said, “and it’s barely a drop in the bucket as to what’s being absorbed.”

* In Orange County, waiting lists are common for a variety of apartments, from one-bedroom units renting for $1,075 in Irvine to two-bedroom units with a view in ritzy coastal areas going for more than $4,000.

* In Santa Monica, where rent control was ended earlier this year, landlords have offered renters of one-bedroom apartments incentives of $20,000 to leave so that rates can be raised to what the market will bear.

With rental applications piling up, some property owners have raised rents every four months. Others lease units from month to month so rates can be raised without restriction.

And in popular areas, such as Pasadena, landlords have demanded across-the-board increases of as much as 25% per month, analysts said.

The tight market presents a stark contrast to conditions earlier in the decade, when flat rental rates were the norm in most areas except Orange and San Diego counties and apartment construction virtually came to a halt.

When the economic boom kicked into gear, construction came nowhere close to matching growth.

“What’s developing is an increasing shortage of housing,” said Garth Erdossy, who heads the Southern California division for BRE Properties Inc., a San Francisco-based firm. The company, which is building 346 rental units near Orange County’s airport, owns and operates more than 22,000 apartment rentals in Western states, mostly in California.

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In Orange County, Erdossy estimates, new apartment construction will fall more than 6,000 units short of demand this year alone. Los Angeles and San Diego counties also will experience severe shortages, he said.

Analysts based the projections on a formula calling for one new apartment for every 1.2 new jobs.

In Southern California, 56,064 apartment units and single-family homes are expected to be completed this year, according to the Construction Industry Research Board, creating one home for every four new jobs.

Vacancy rates have dwindled to historic lows in Ventura, Orange and San Diego counties and are nearly at record lows in Los Angeles County. Yet the seven-county region is expected to build at least 4,000 fewer units than metropolitan Houston, which has roughly 25% of Southern California’s population.

The housing shortage could have an economic downside, causing businesses to move to cheaper housing markets in the West such as Phoenix, Salt Lake City or Albuquerque, Erdossy said. Already, he added, businesses increasingly question whether such a move should be made.

“I don’t believe it’s happened yet, but those of us focused on providing housing are seeing scary things,” Erdossy said.

“When you have to pay $1,000 for a studio that’s 550 square feet, then something’s wrong. We’ve seen that in Los Angeles before, but we have not seen rents like that in Orange County and San Diego. I worry that economic growth will be squashed.”

High housing costs overall in Orange County are one of the prime reasons why labor-intensive businesses, such as light manufacturing, have looked elsewhere to expand or relocate.

As a result, affordable housing has become a top priority for the county’s largest business group, the Orange County Business Council, said Peter Case, vice chairman for economic development, who led a task force that studied the issue for the group.

“It’s a serious issue for business,” said Case, a senior vice president at Merrill Lynch & Co., which gave $1 million last year to create a public-private partnership to tackle the issue. “The cost of housing is one of the greatest obstacles for those companies to overcome.”

With apartment units in high demand, few low- or moderate-priced units are being built, according to a report from E&Y; Kenneth Leventhal Real Estate Group.

More than one-third of renter households in Los Angeles pay more than one-half of their incomes for rent. The tight market and higher rents have “created a large affordable housing shortage in Los Angeles that is getting progressively worse and may be hindering county job growth,” the report said.

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The number of low-income rental units could shrink even further as more property owners pull out of a federally subsidized housing program to seek higher rents on the open market.

In a move to curb this exodus, the Department of Housing and Urban Development said recently it will boost subsidies to property owners who remain in the program.

Rising construction costs also are contributing to the lack of lower-priced units, analysts say.

In Los Angeles and Orange counties, land near job centers is increasingly scarce. And in San Diego and Ventura counties, construction has been curtailed by new voter-approved initiatives intended to limit growth.

With land prices mushrooming, builders opt for higher-cost, luxury units in prime areas, such as south Orange County, Venice and downtown Los Angeles, that appeal to affluent consumers.

The tight rental market, while a concern for business and a hardship for many renters, has been a boon for landlords, who no longer have to offer free rent or other incentives to fill vacant units.

“I used to drive down the street and see $399 move-in specials,” said Jay Skendarian, partner in a Newport Beach apartment brokerage that sells apartment complexes throughout Southern California.

“Now, I drive down the street and don’t even see for-rent signs,” he said. “Everybody’s pushing up rents, and that’s driving the market.”

In Los Angeles, rents at apartment buildings open for a year or more have shot up 12% through the first quarter, the nation’s highest rate, according to M/PF Research Inc. The Dallas-based apartment rental research firm compiles statistics based on rent changes in nearly 900,000 units nationwide.

The firm found that rents jumped 9% in San Diego County, 6% in Orange County and 5% in Riverside County during the same period, even though those areas recorded some of the biggest rental gains in the nation a year earlier.

Rents in those counties are moving up now at a faster clip than in San Francisco, which has been the nation’s highest rental market through most of the 1990s.

“Renters who moved or renewed apartment leases in the last few months likely experienced some sticker shock,” said Ron Witten, president of M/PF.

Nationwide, monthly rents rose 5% to $826, the largest gain this decade, Witten said. Led by sharp rent increases in the Western U.S., six California metropolitan areas continued to rank among the nation’s top 10 rental markets, including Los Angeles, San Diego and Orange counties.

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Tracking the Apartment Boom

Number of multifamily housing permits issued for the six major Southern California counties and the state overall during the first three months of 1999. Includes duplexes, condominiums and apartments with five or more units.

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Area 1999 1998 % Change San Diego County 2,219 666 233% Los Angeles County 1,168 420 178% Orange County 1,418 557 155% Riverside County 194 372 -48% San Bernardino County 62 116 -47% Ventura County 40 44 -9% Southland Totals 5,104 2,175 135% Statewide Totals 7,808 5,058 54.5%

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Source: California Industry Research Board