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USC Casden Forecast Sees Resilient Southern California Apartment Market in 2005

April 5, 2005

LOS ANGELES (Business Wire) - Average asking rents and occupancy rates in Southern California's multifamily markets will continue to improve at a steady pace with average rent increases ranging from three-and-one-half to almost six percent this year, according to the Casden Real Estate Economics Forecast released today by the University of Southern California Lusk Center for Real Estate (www.usc.edu/lusk). "The new supply of apartments has not kept up with demand from newcomers attracted to jobs in our diverse economy and the Southern California life-style," said Delores Conway, Ph.D., director of the Casden Forecast. "Apartment occupancies are at all time highs in Los Angeles, Orange, Riverside and San Bernardino Counties because of a steady stream of young professionals and Latin and Asian immigrants who cannot afford the average home along with relocated executives who choose not to get locked into a mortgage," she explained. Conway pointed out that Southern California's steadily growing and diversified economy sets the stage for increased job formation and more demand for apartments in the coming year.

For 2005, the average rental rate for a two-bedroom apartment should rise to approximately $1,500 in Los Angeles County, $1,520 in Orange County and $1,080 in the Inland Empire, according to data compiled for the Casden Forecast. The Forecast analyzes apartment transactions, new building permits, leasing activity and employment data to produce forecasts of rent and vacancy levels in Los Angeles County, Orange County and the Inland Empire. The analysis incorporates unit-level data purchased from M/PF YieldStar, Inc. with county economic data. The Casden Forecast was sponsored by Bank of the West, California National Bank, East West Bank, Pillsbury Winthrop LLP and Stewart Title.

Los Angeles County Forecast
Apartment rents increased 15 percent from 2001 to 2004 even though many renters took advantage of low mortgage rates and moved out to become homeowners. Despite the additional supply of vacant units, strong demand kept apartment occupancies high and put upward pressure on rents. Currently, there are some one million apartment units in the county with inventory growing at only one percent a year for the past five years. With high occupancy rates and increasing rents, the Los Angeles multifamily market is one of the most sought after in the nation as pension funds, real estate investment trusts and private investors buy available properties at record prices.

The average rent for a two-bedroom unit is the highest in West Los Angeles at $2,319, nearly double the price for the same unit in the Antelope Valley. For the rest of 2005, rents should increase almost 4% to an average of approximately $1,200 for a one-bedroom, $1,500 for a two-bedroom and $1,700 for a three-bedroom unit. Occupancy rates will remain tight as job growth picks up throughout the county. New construction will help meet demand in the downtown area and also in Santa Clarita where renters are attracted to upscale lower-cost units within commuting distance of Burbank and the San Fernando Valley.

Orange County Forecast
The apartment market in Orange County proved to be strong in 2004 with a gain of 3,760 units, as new construction helped meet the demands of renters attracted to the schools, jobs and lifestyle of Irvine while more affordable units attracted renters to North Orange County and Buena Park. With the average home price rising to $628,000 at the end of 2004, the premium to buy rather than rent housing is larger in Orange County than practically any other metropolitan area in the nation. Viewed in this context, recent annual rent increases of 4.3% are far less than comparable 20% to 25% annual increases in the median price of a single-family home. Orange County also ranks as one of the top areas in the United States for multifamily investment.

As the Southern Californian economic expansion continues, an expected 2% job growth in Orange County will keep apartment demand high with occupancy rates moving towards 96 percent in the next two years. Irvine occupancy rates will climb as renters fill new units being constructed at a steady clip. Due to new construction, Irvine commands the highest rates of all the county's submarkets with $2,058 for a three-bedroom unit. The same size unit is $1,494 in Anaheim.

Overall, rental rates should rise about 3.5% in the near term resulting in rents of approximately $1,200 for a one-bedroom, $1,500 for a two-bedroom and $2,000 for a three-bedroom unit.

Inland Empire Forecast
Located in the one of the strongest economic regions in the nation, the Inland Empire multifamily market has been very robust, benefiting from the region's long-standing position as the economic powerhouse of Southern California. With employment growth of 2.4% to 3.7% for the last six years, employers added 28,400 new jobs in 2004. Apartment occupancy rates have exceeded 96 percent each year since 2001 and demand has been largely matched by supply. But this trend may change in the future as a record 6,000 apartments are currently under construction in Riverside and San Bernardino Counties. Strong job growth is expected to create sufficient demand to occupy most of the available new supply, but perhaps not all of it.

Average rental rates are currently at all-time highs, with 2004 increases of approximately 6 percent because of strong demand. While the median home price of $322,400 is substantially less than the $470,900 for neighboring Los Angeles, rising prices and higher mortgage rates have helped to sustain strong apartment demand across all submarkets. The strong trade sector, cheap land and a steady flow of new businesses will keep the Inland Empire apartment market robust for the next two years.

Annual rents should increase about 5.2% through 2005 bringing a one-bedroom unit to nearly $900, a two-bedroom to $1080 and a three bed-room unit to $1380.

Copies of the Casden Real Estate Economics Forecast can be obtained for $75 by calling the USC Lusk Center at (213) 740-5000 or by email: lusk@marshall.usc.edu.