Industry professionals gathered at the USC Casden Mulitfamily Forecast conference on September 24 to hear expert opinions about the California multifamily market. Pleasantly, and maybe surprisingly, the overall forecast was very positive. After welcome comments,Richard K. Green, the director for USC Lusk Center for Real Estate, gave a multifamily forecast using data fromReis Inc., which he described as “very thorough.” The data considered all property types with 20 units or more to offer the most comprehensive results possible.
Although Green declared the "market is the healthiest it has been in a long time,” he also noted issues with affordability and high rent costs. Average rents are currently at an all-time high at $1,440 per month in Los Angeles, while vacancy rates throughout Southern California are extremely low. He pointed to some submarkets in San Diego with vacancy rates lower than 1%. Typically, such low vacancy rates might warrant rent increases; however, Green felt that tenants might start sharing space if rents become too high. Slow job growth is connected to this issue. Employment in Los Angeles and San Diego is up 1.6% while Orange County, which has more college-educated jobseekers, is trending better with employment up 2.1%. For Los Angeles rents to stabilize, the city will need to gain 20,000 units per year. In 2013, Los Angeles gained 10,000.
Two panels then responded to Green’s forecast. Speakers Dave Bragg, managing director atGreen Street Advisors, Con Howe, managing director at Los Angeles Fund CityView, Kevin Kaberna, managing director and principal at Greystar and Mitchell W. Kiffe, senior managing director at CBRE Capital Markets with moderator Michael L. Matkins, senior partner at Allen Matkins were on the first panel; while Jim Anderson, CEO of Baru Investments, Inc., Alan W. George EVP and CIO at Equity Residential, William B. Montgomery, president of acquisitions and investment at SARES-REGIS Group and Chris Payne, senior VP of development atAvalonBay Communities with moderator Steven K. Fowlkes, president of R.W. Selby & Co., made up the second.
Both panels discussed Gen-Y as a major driver of demand, which is causing a lifestyle shift. The new renter wants to live close to work, is willing to take public transportation and a needs a highly walkable neighborhood. Likewise, they are willing to pay a high dollar amount per square foot, and want high-end finishes. Gen-Y renters are particularly interested in mixed-use complexes that offer the opportunity to live, work and play in a single community. In addition, micro units were also particularly attractive, with panelists pointing to complexes in Santa Monica bringing in $7 per-square-foot and others in San Francisco at $9 per-square-foot.
Due to this lifestyle shift, understanding the renter demographic is very important. The Gen-Y group is getting married much later in life and prefers rentals to owning a home. Matkins has also noticed that L.A. is moving toward “villages,” as he called them, or small neighborhood communities similar to New York, which opposes the former idea of creating a separate “oasis.” Among the most sought after markets for this new Gen-Y tenant are Culver City, Silverlake and Larchmont Village.
Gen-Y renters will prove to be a major driver of demand and development projects in the multifamily market in 2014 and 2015. Once this generation begins to settle down and have children, the market may have to adapt again as the Gen-Y lifestyle changes.