By Brad Berton, Contributing Editor
May 3, 2011
Southern California apartment owners might collectively adopt an encouraging motto as they track the hard-hit regional market’s ongoing recovery: “We’re halfway home.”
“Southern California metros generally have regained about half the [multifamily] occupancy that was lost during the recession,” calculates Greg Willett, vice president of research at MPF Research.
But as multi-housing pros here prepare for another hot summer, Willett also points out that effective rental rate gains in Southern California have amounted to only half the nationwide average over the past year. More specifically, SoCal’s four primary markets experienced gains of just 1.5 to 1.8 percent—a pretty weak performance relative to the nationwide average of 3.2 percent.
The more comforting news: Slowly recovering apartment occupancies in the three big coastal counties have returned to more manageable levels. As Marcus & Millichap reports, prevailing average vacancies in Los Angeles, Orange and San Diego Counties range from the low-4s to the mid-5s—and falling.
The weaker exceptions are the hotter, drier Riverside and San Bernardino Counties, comprising the region’s boom-and-bust-prone Inland Empire. The vacancy rate there is still about 7 percent, but Marcus & Millichap projects a decline of about 70 bps by the end of the year.
“The Inland Empire is really struggling,” laments regional apartment owner Chris Mitchell, founder of Crown Acquisitions.
Elusive employment growth is a primary factor holding back apartment absorption out east and in the coastal counties. The Inland Empire’s unemployment rate is still scary at more than 14 percent, and even L.A. County remains over 12 percent.
The rate in San Diego County, where apartment occupancies are fairly tight at 96 percent, is still above 10 percent. But at least Orange County’s has dipped back into single-digits.
One factor that should further reduce vacancies—but won’t exactly help the employment situation—is that apartment construction in the region is at a fraction of historical production levels. Marcus & Millichap projects 2011 deliveries in the four primary Southern California markets to total 2,500 units—and nearly half of them will be in L.A. County. That’s a tiny amount of new product for a region with a population now approaching 25 million.
Perhaps predictably, given still-depressed rental rates and the supply-constrained region’s notoriously high land costs, only in rare cases today are market-rate developers encountering project economics that justify paying prevailing prices for development sites, observes Crown Acquisitions analyst Brett Bayless.
“If you’re not already land-banking, you just can’t justify what it costs to buy land,” he says. But that may change in the not-too-distant future as lenders that have taken back sites look to sell REO properties more aggressively, Bayless notes.
Even amid scant conventional apartment production, however, Willett concludes that SoCal won’t return to “true health” until 2013-2014. Nevertheless, REITs and other institutional buyers appear to be bidding for quality properties as if recovery in the regional markets was already well beyond the halfway point.
Indeed, with prospective buyers outnumbering acquisition opportunities in the region, institutional types are frequently paying prices translating to sub-5 cap rates for top-tier properties, relates Stephen Stein, first vice president overseeing Marcus & Millichap’s L.A. operations.
AvalonBay Communities, Essex Property Trust and UDR Inc., for example, have been active acquirers of large Southern Cal communities of late.
Developments built to condo specs, then converted to rentals as the for-sale sector cratered, are a particularly hot product among these players. For instance, Essex recently paid $80 million for Anavia, an 82 percent leased, 250-unit converted condo project in Anaheim.
Indeed, Mitchell perceives a clear “flight to quality” among active buyers in Orange County especially—with cap rates on some highly competitive transactions coming in as low as 4.5 percent.
Los Angeles County
While Marcus & Millichap projects continued gradual improvement in L.A. vacancies and effective rents, the economy isn’t exactly on fire. Job growth in L.A. has been tame and will likely remain muted into next year, laments Paul Darrow, a Marcus & Millichap associate.
“Unemployment is the elephant in the room here,” Darrow continues, adding that the situation stands to limit much in the way of rent growth over the coming years.
While strained budgets are cutting into public employment, Darrow and Stein identify a few economic bright spots. Health care employment is growing, and L.A. is seeing new restaurants and other start-up businesses taking advantage of the city’s depressed commercial rents.
The city’s signature industry is also helping fill apartments. “The entertainment sector is one growth area driving demand for apartments” in areas such as Hollywood, North Hollywood/Burbank and L.A.’s Westside, notes Stein.
Among few noteworthy new multi-housing developments, Alta and Jefferson are suddenly playing starring roles in Tinseltown. Wood Partners’ 218-unit Alta Hollywood just opened a few blocks from Oscars venue Kodak Theatre, following last June’s opening of JPI’s nearby 270-unit Jefferson@Hollywood.
Downtown L.A. is another bright spot given its employment trends and ever-burgeoning resident amenities. Architectural firm Gensler’s pending relocation from Santa Monica to downtown says a lot about the CBD’s attractiveness, Stein and Darrow agree.
After declining about 50 bps in 2010, L.A. vacancies should continue downward by another 40 points to end the year around 4.4 percent, according to Marcus & Millichap. RealFacts, meanwhile, reports that average overall asking rents are just over $1,600—up 2.8 percent from one year ago. And Marcus & Millichap projects a comparable hike in effective rents over the course of the year.
Orange County
Orange County’s comparably stronger economy and slowed-to-a-trickle development pipeline should generate more pronounced near-term improvements in occupancies and effective rents;
indeed “The O.C.” can expect a paltry 300-some unit deliveries over the course of 2011.
Unemployment here is 9.2 percent—well above normal economic times but at least better than elsewhere in SoCal. Strength of late is coming from the O.C.’s stronghold in leisure and hospitality, as well as professional and business services.
The environment here has been a contrast in renter demand between the luxury-level and Class B and C sectors, Crown’s Mitchell and Bayless relate. Local Class A owners got hammered with the loss of so many residents that made good livings in the subprime mortgage sector.
But as those jobs disappeared with the housing crash, these residents could no longer pay the rent in coastal communities, with many opting for densely populated inland and northern submarkets such as Fullerton and Buena Park, where rents are 30 percent or 40 percent lower, Bayless elaborates.
Meanwhile, tourism-related employment in North County has been rebounding as Disneyland and convention-oriented hotels are beginning to experience stronger visitation.
Average rents county-wide bottomed out below $1,475 in late-2009, according to RealFacts. The average improved somewhat over the following year, but then slipped from $1,492 to $1,475 during 2010’s fourth quarter.
Marcus & Millichap projects that the O.C.’s vacancies will decline a substantial 130 bps, to about 4.4 percent over the course of 2011, helping boost effective rents by 4.5 percent.
Currently, development plans are solidifying in the high-end commercial district near John Wayne Airport, in and around Irvine. AvalonBay and Mill Creek Residential have near-term plans for 500-some units, and Mitchell expects local powerhouse Irvine Co. to begin development of projects on nearby land the company has owned for decades.
Inland Empire
Apartment owners can take at least a bit of comfort in realizing the Inland Empire’s ranks among the nation’s most foreclosure-plagued markets; at least the area has seen thousands of former homeowners join the rental pool. Accordingly, with employment recovering, and a minuscule 600 new units scheduled for delivery during 2011, multifamily occupancies and rents are headed north.
The Empire is expected to post positive net employment growth this year, for the first time in a half-decade—although it will most likely be moderate to the tune of 16,000 positions, factoring to a 1.5 percent growth rate. Marcus & Millichap is projecting vacancies will likely end the year at a still-uncomfortable 6.3 percent—but that’s a 70-bp decline from the beginning of the year.
Rents currently average about $1,065, representing a recovery of about 1.2 percent since the market bottomed out, according to RealFacts. Marcus & Millichap, meanwhile, anticipates a 2.2 percent gain in effective rental rates over the course of 2011.
The Empire’s western periphery generally should see superior gains in demand as the
regional economy continues to recover, due to its proximity to employment centers in the coastal counties. Meanwhile, apartments in the more remote eastern submarkets will continue to face challenges.
But the Moreno Valley vicinity may well be a notable eastern exception here, as it should feel a surge in demand from workers building the massive $3.3 billion March LifeCare campus and the Sketchers mega-distribution center.
San Diego County
With employment strengthening and just 500 units slated for delivery this year, San Diego County’s apartment sector is in store for continued tightening—and likely some hefty near-term rent gains.
Marcus & Millichap is projecting vacancies will end the year approaching 3.5 percent, down from just over 4 percent at the beginning of the year. And effective rental rates are on track to rise a strong 4.7 percent over the course of the year.
San Diego rents haven’t declined to the degree seen in the rest of Southern California, as “the economic vacancy rate hasn’t fluctuated all that much,” Bayless observes. He’s seeing rents move upward at Crown’s properties there, although he characterizes the growth rate as “slow to moderate.”
RealFacts reports that average San Diego rents appear to have bottomed out about a year ago at $1,357. Recovery has been modest since, at roughly 1.5 percent.
The projected 2 percent employment growth in the county this year should push unemployment back toward single-digits—with the particular strength in higher-income industries, boosting demand for Class A rentals.
Recoveries in San Diego’s renowned biotech and telecom sectors bode well for ongoing employment recovery and renter demand, along with the military’s vast presence in the county, Mitchell relates. Meanwhile North County should see resurgent demand for Class B and C apartments, in particular, as construction of a major hospital at Camp Pendleton will require 1,000-some workers.
Source: Multi-Housing News Online
May 3, 2011
Southern California apartment owners might collectively adopt an encouraging motto as they track the hard-hit regional market’s ongoing recovery: “We’re halfway home.”
“Southern California metros generally have regained about half the [multifamily] occupancy that was lost during the recession,” calculates Greg Willett, vice president of research at MPF Research.
But as multi-housing pros here prepare for another hot summer, Willett also points out that effective rental rate gains in Southern California have amounted to only half the nationwide average over the past year. More specifically, SoCal’s four primary markets experienced gains of just 1.5 to 1.8 percent—a pretty weak performance relative to the nationwide average of 3.2 percent.
The more comforting news: Slowly recovering apartment occupancies in the three big coastal counties have returned to more manageable levels. As Marcus & Millichap reports, prevailing average vacancies in Los Angeles, Orange and San Diego Counties range from the low-4s to the mid-5s—and falling.
The weaker exceptions are the hotter, drier Riverside and San Bernardino Counties, comprising the region’s boom-and-bust-prone Inland Empire. The vacancy rate there is still about 7 percent, but Marcus & Millichap projects a decline of about 70 bps by the end of the year.
“The Inland Empire is really struggling,” laments regional apartment owner Chris Mitchell, founder of Crown Acquisitions.
Elusive employment growth is a primary factor holding back apartment absorption out east and in the coastal counties. The Inland Empire’s unemployment rate is still scary at more than 14 percent, and even L.A. County remains over 12 percent.
The rate in San Diego County, where apartment occupancies are fairly tight at 96 percent, is still above 10 percent. But at least Orange County’s has dipped back into single-digits.
One factor that should further reduce vacancies—but won’t exactly help the employment situation—is that apartment construction in the region is at a fraction of historical production levels. Marcus & Millichap projects 2011 deliveries in the four primary Southern California markets to total 2,500 units—and nearly half of them will be in L.A. County. That’s a tiny amount of new product for a region with a population now approaching 25 million.
Perhaps predictably, given still-depressed rental rates and the supply-constrained region’s notoriously high land costs, only in rare cases today are market-rate developers encountering project economics that justify paying prevailing prices for development sites, observes Crown Acquisitions analyst Brett Bayless.
“If you’re not already land-banking, you just can’t justify what it costs to buy land,” he says. But that may change in the not-too-distant future as lenders that have taken back sites look to sell REO properties more aggressively, Bayless notes.
Even amid scant conventional apartment production, however, Willett concludes that SoCal won’t return to “true health” until 2013-2014. Nevertheless, REITs and other institutional buyers appear to be bidding for quality properties as if recovery in the regional markets was already well beyond the halfway point.
Indeed, with prospective buyers outnumbering acquisition opportunities in the region, institutional types are frequently paying prices translating to sub-5 cap rates for top-tier properties, relates Stephen Stein, first vice president overseeing Marcus & Millichap’s L.A. operations.
AvalonBay Communities, Essex Property Trust and UDR Inc., for example, have been active acquirers of large Southern Cal communities of late.
Developments built to condo specs, then converted to rentals as the for-sale sector cratered, are a particularly hot product among these players. For instance, Essex recently paid $80 million for Anavia, an 82 percent leased, 250-unit converted condo project in Anaheim.
Indeed, Mitchell perceives a clear “flight to quality” among active buyers in Orange County especially—with cap rates on some highly competitive transactions coming in as low as 4.5 percent.
Los Angeles County
While Marcus & Millichap projects continued gradual improvement in L.A. vacancies and effective rents, the economy isn’t exactly on fire. Job growth in L.A. has been tame and will likely remain muted into next year, laments Paul Darrow, a Marcus & Millichap associate.
“Unemployment is the elephant in the room here,” Darrow continues, adding that the situation stands to limit much in the way of rent growth over the coming years.
While strained budgets are cutting into public employment, Darrow and Stein identify a few economic bright spots. Health care employment is growing, and L.A. is seeing new restaurants and other start-up businesses taking advantage of the city’s depressed commercial rents.
The city’s signature industry is also helping fill apartments. “The entertainment sector is one growth area driving demand for apartments” in areas such as Hollywood, North Hollywood/Burbank and L.A.’s Westside, notes Stein.
Among few noteworthy new multi-housing developments, Alta and Jefferson are suddenly playing starring roles in Tinseltown. Wood Partners’ 218-unit Alta Hollywood just opened a few blocks from Oscars venue Kodak Theatre, following last June’s opening of JPI’s nearby 270-unit Jefferson@Hollywood.
Downtown L.A. is another bright spot given its employment trends and ever-burgeoning resident amenities. Architectural firm Gensler’s pending relocation from Santa Monica to downtown says a lot about the CBD’s attractiveness, Stein and Darrow agree.
After declining about 50 bps in 2010, L.A. vacancies should continue downward by another 40 points to end the year around 4.4 percent, according to Marcus & Millichap. RealFacts, meanwhile, reports that average overall asking rents are just over $1,600—up 2.8 percent from one year ago. And Marcus & Millichap projects a comparable hike in effective rents over the course of the year.
Orange County
Orange County’s comparably stronger economy and slowed-to-a-trickle development pipeline should generate more pronounced near-term improvements in occupancies and effective rents;
indeed “The O.C.” can expect a paltry 300-some unit deliveries over the course of 2011.
Unemployment here is 9.2 percent—well above normal economic times but at least better than elsewhere in SoCal. Strength of late is coming from the O.C.’s stronghold in leisure and hospitality, as well as professional and business services.
The environment here has been a contrast in renter demand between the luxury-level and Class B and C sectors, Crown’s Mitchell and Bayless relate. Local Class A owners got hammered with the loss of so many residents that made good livings in the subprime mortgage sector.
But as those jobs disappeared with the housing crash, these residents could no longer pay the rent in coastal communities, with many opting for densely populated inland and northern submarkets such as Fullerton and Buena Park, where rents are 30 percent or 40 percent lower, Bayless elaborates.
Meanwhile, tourism-related employment in North County has been rebounding as Disneyland and convention-oriented hotels are beginning to experience stronger visitation.
Average rents county-wide bottomed out below $1,475 in late-2009, according to RealFacts. The average improved somewhat over the following year, but then slipped from $1,492 to $1,475 during 2010’s fourth quarter.
Marcus & Millichap projects that the O.C.’s vacancies will decline a substantial 130 bps, to about 4.4 percent over the course of 2011, helping boost effective rents by 4.5 percent.
Currently, development plans are solidifying in the high-end commercial district near John Wayne Airport, in and around Irvine. AvalonBay and Mill Creek Residential have near-term plans for 500-some units, and Mitchell expects local powerhouse Irvine Co. to begin development of projects on nearby land the company has owned for decades.
Inland Empire
Apartment owners can take at least a bit of comfort in realizing the Inland Empire’s ranks among the nation’s most foreclosure-plagued markets; at least the area has seen thousands of former homeowners join the rental pool. Accordingly, with employment recovering, and a minuscule 600 new units scheduled for delivery during 2011, multifamily occupancies and rents are headed north.
The Empire is expected to post positive net employment growth this year, for the first time in a half-decade—although it will most likely be moderate to the tune of 16,000 positions, factoring to a 1.5 percent growth rate. Marcus & Millichap is projecting vacancies will likely end the year at a still-uncomfortable 6.3 percent—but that’s a 70-bp decline from the beginning of the year.
Rents currently average about $1,065, representing a recovery of about 1.2 percent since the market bottomed out, according to RealFacts. Marcus & Millichap, meanwhile, anticipates a 2.2 percent gain in effective rental rates over the course of 2011.
The Empire’s western periphery generally should see superior gains in demand as the
regional economy continues to recover, due to its proximity to employment centers in the coastal counties. Meanwhile, apartments in the more remote eastern submarkets will continue to face challenges.
But the Moreno Valley vicinity may well be a notable eastern exception here, as it should feel a surge in demand from workers building the massive $3.3 billion March LifeCare campus and the Sketchers mega-distribution center.
San Diego County
With employment strengthening and just 500 units slated for delivery this year, San Diego County’s apartment sector is in store for continued tightening—and likely some hefty near-term rent gains.
Marcus & Millichap is projecting vacancies will end the year approaching 3.5 percent, down from just over 4 percent at the beginning of the year. And effective rental rates are on track to rise a strong 4.7 percent over the course of the year.
San Diego rents haven’t declined to the degree seen in the rest of Southern California, as “the economic vacancy rate hasn’t fluctuated all that much,” Bayless observes. He’s seeing rents move upward at Crown’s properties there, although he characterizes the growth rate as “slow to moderate.”
RealFacts reports that average San Diego rents appear to have bottomed out about a year ago at $1,357. Recovery has been modest since, at roughly 1.5 percent.
The projected 2 percent employment growth in the county this year should push unemployment back toward single-digits—with the particular strength in higher-income industries, boosting demand for Class A rentals.
Recoveries in San Diego’s renowned biotech and telecom sectors bode well for ongoing employment recovery and renter demand, along with the military’s vast presence in the county, Mitchell relates. Meanwhile North County should see resurgent demand for Class B and C apartments, in particular, as construction of a major hospital at Camp Pendleton will require 1,000-some workers.
Source: Multi-Housing News Online
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