Southern California Apartments to See Further Rental Declines

Most of southern California's apartment markets are facing another year of declining rents as the lackluster job formation continues to put pressure on demand for rental housing

Dees Stribling, Contributing Editor

Los Angeles–Most of southern California’s apartment markets are facing another year of declining rents as the lackluster job formation continues to put pressure on demand for rental housing, according to the most recent Casden Real Estate Economics Forecast, released this week by the University of Southern California Lusk Center for Real Estate. Also, a large shadow supply of single-family homes and condos for lease in SoCal will continue pushing rents in a downward direction.

The Los Angeles County apartment market is a prime example of lost jobs depressing rents, with over 142,000 positions eliminated by employers in 2009. “Average rents have fallen… 8.0 percent from their peak in Q2 of 2008,” notes the Casden Real Estate Economics Forecast, with the largest declines seen in Intown (9.9 percent), West LA (6.9 percent) and Antelope Valley (6.7 percent). In 2010, the forecast predicts an average 3.5 percent decline in rents throughout LA County. Some LA submarkets, including East LA and the Santa Clarita Valley, that have suffered less than others, however, and they may even see modest rebounds in rents in 2010 as jobs trickle back.

In Orange County, more than 53,000 people lost their jobs in 2009, and rents are down 7.7 percent from their peak in 3Q08. The forecast predicts that rents will fall 2.5 percent in Orange County in 2010. The Inland Empire, which lost 55,000 jobs in 2009, will see rental declines of only about 1 percent in 2010, partly because the delivery of new units this year is expected to be half the total of last year.

San Diego County is the only part of southern California expected to see rental increases this year, notes the forecast, in part because its 2009 jobs losses (43,000) were the lowest in southern California relative to the size of its labor market, and in part because rents are still fairly high for shadow-market homes and condos. Apartment rents dropped by 1.3 percent in 2009 in San Diego County, but will rise 0.7 percent this year.

Though the overall 2010 outlook for rents isn’t promising for SoCal landlords, there are also factors at work that will help raise rents eventually, especially the sharp drop in new multifamily construction throughout southern California. “Declines in new construction in these areas ranges from 15 percent in Los Angeles County to 60 percent in Orange County,” Tracey Seslen, assistant professor of clinical finance, USC Marshall School of Business, and one of the co-authors of the study (with Richard K. Green), tells <i>MHN.</i> “As time passes, the amount of new supply owing to conversions of condominiums into rental units will decrease, and the new supply coming online will be a better reflection of developers’ true expectations of demand.”

Selsen adds that the reduction in new supply is one of only a number of factors that will help determine future rents in the region. “Employment is arguably the most important factor–after devastating job losses in 2009, employment is expected to flatten out in 2010,” she posits. “If individuals have jobs and money to spend, we will see less doubling-up and exiting of the rental market to live with relatives. This will, in turn, support rents.”