Northern CaliforniaSouthern California

Western Rental Markets Pick Up

August 11, 2011
Our rental forecast calls for solid rent growth in the U.S. over the next five years. Western markets such as Seattle, San Jose/San Francisco, Orange County and San Diego, which generally have high barriers to entry and above average income levels, will be among the nation’s top-performing rental markets in coming years.
Apartment supply will soon increase in many western markets, coming off very low levels. Development money is flowing into apartments and construction activity is already picking up. Our apartment feasibility business is growing rapidly and the number of projects we are finding that are on the drawing boards, or with land in escrow at very high prices, is staggering. In the first half of 2011, multi-family permit issuance is up nearly 70% in the major western markets, with big increases in Los Angeles, Orange County, San Diego, Seattle and San Francisco. The biggest absolute increases are in the Los Angeles and Orange County markets. In the closely-watched San Jose market, year-to-date multi-family permits are actually running behind 2010 levels, but strong rent growth and job growth are attracting investors. When you factor in the large number of entitled, “ready to go” units, plus government attempts to encourage construction, it’s likely there are more near-term additions.
Housing affordability is excellent, which can compete with rentals. In some markets, like Sacramento, the Inland Empire, Las Vegas, Denver and Phoenix, the availability of for-sale ownership options at historically affordable pricing is a competitive factor for rental product. But in the more expensive coastal markets, home prices are still out of reach for many households. This allows property owners to boost rents. Through 2015, we expect that it will continue to be more expensive to own a home than to rent in many western coastal markets. (i.e. San Diego, Orange County, Seattle, etc.) When consumer confidence returns, renters are more likely to seek homeownership.

A wide and more diverse variety of rental products is being developed in western markets. Builders are developing a range of products that include townhomes with garages (often re-purposed for-sale product in suburban areas), low and mid-rise buildings in suburban and urban locations, and converting busted condo deals to rental. In San Diego, the 680-unit Vantage Pointe high-rise purchased by Equity Residential in Fall 2010 is nearing 80% occupancy after less than a year. Changes in demographics, lifestyle preferences, continued urban re-development close to job centers and financial constraints are all contributing to a more diverse demand for rental unit products and locations.

The apartment market clearly presents great opportunity in coming years. A combination of solid macro analysis as well as location-specific analysis will assure that investors make the right decisions. Projecting future supply, as well as understanding renter options for homeownership, will be two very important pieces of analysis that are often overlooked. If you are interested in our Apartment Market Monitor or in a customized analysis of a specific project, contact us.

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