Multiple Southern California rental markets are feeling the pinch as the recession and skyrocketing unemployment rate cause renters to look elsewhere. Among the hardest hit in the region are Los Angeles County and Riverside and San Bernardino counties, commonly referred to as the Inland Empire. Though not completely out of the woods yet, San Diego and Orange counties have fared moderately well.
Los Angeles
According to the annual USC Lusk Center Casden Forecast, 41,000 Los Angeles residents left their apartments last year, mostly in search of cheaper housing options or more job opportunities. Despite boasting a population of nine million, these 41,000 people had a profound effect on the county’s rental market, especially considering the fact that Los Angeles has only added 29,000 new renters in the pasts five years.
“We are seeing the effects of the recession on LA's rental market,” said Delores Conway, the forecast’s director. “Unemployment in LA County is almost 12 percent...[and] as people lose their jobs they tend to double up in apartments or homes with family and friends. Some residents are also leaving the area and moving to other jobs.”
Last month, the U.S. unemployment rate hit 8.5 percent, while California’s stood at 10.9 percent, placing Los Angeles way ahead of the curve. The county lost 130,000 jobs between February 2008 and February 2009, according to the state Economic Development Department. In fact, this past February ushered in another huge round of layoffs for many of the county’s once-thriving sectors. The retail industry lost 4,800 jobs, with the transportation, utilities, publishing, telecommunications, construction and finance industries experiencing huge losses as well, which altogether totaled an additional 9,000 job losses. The forecast anticipates that the San Fernando Valley will be hit particularly hard by layoffs in the upcoming months, which will lead to even lower occupancy rates and rents.
One might think that the rising rate of foreclosures, combined with the general loss of equity that many Americans are feeling as they check their stock portfolios and retirement accounts would cause Los Angeles’ rental market to perform better as people downsize their living quarters and quality of lives. This has not been the case, however, as a lack of job prospects and security has forced many residents out of one of America’s most desirable destinations.
Los Angeles County rents fell nearly 4 percent in 2008, with Casden Forecast noting that this downward trend is likely to continue through 2009 until the economy turns around, which is not predicted to happen until late 2009 or mid-2010. The forecast is quick to point out, however, that unemployment isn’t the only thing to blame for the declining rental pool. A substantial amount of units came online over the past few years, creating a glut in the market and fierce competition among owners, developers and landlords. Downtown Los Angeles alone, which is primarily known as a commuter town despite its recent attempt at a renaissance, received approximately 4,000 units in 2008. The forecast also noted that many of the new condominiums that came to market in 2008 ended up being rented instead of sold, adding to the large supply of vacant units. These condos were particularly hurtful to the Downtown and Hollywood apartment markets.
Another culprit in the shrinking multifamily market is high rents. Los Angeles County posts some of the most expensive rents in the country. The average cost for a one-bedroom apartment at the end of last year was $1,397 a month, with rents reaching significantly higher levels in some of the more affluent regions of the county, including the Westside communities of Santa Monica, Beverly Hills, Westwood and Brentwood.
More affordable communities include Long Beach and the San Gabriel Valley. The 4-percent decline in rents that the Casden Forecast reported is not likely to help the county’s many struggling renters. This would only amount to a $55-a-month savings, hardly a drop in the bucket when you consider the costs of living in Los Angeles.
To keep their units occupied landlords are taking desperate measures to ensure that their property goes above and beyond the average rental. Concessions are rampant, and generally include a month’s worth of free rent, reduced security deposits and special allowances for pets. They may also throw in extra parking spots or street permits to sweeten the deal, along with coupon books and gift certificates that offer a barrage of discounted and complimentary local services like personal training sessions, food-and-wine pairings, or tickets to museums, concerts or athletic events. These concessions can be smart moves, considering that many Los Angeles residents have had to cut these types of extras from their tightening budgets.
Other Southern California Regions
The status of other Southern California rental regions is mixed, according to the Casden Forecast. The Inland Empire’s unemployment rate is even higher than Los Angeles’ at 12.2 percent, with many economists predicting that it could reach 14 percent. The region’s rental market is also being hit by the large number of foreclosures available throughout Riverside and San Bernardino counties. “The substantial volume of foreclosures in the Inland Empire is drawing some former renters into these two counties as they buy affordable houses with low mortgage rate loans,” Conway said. “We have seen home sales pick up in this area this year and many first-time homebuyers, who were former renters, are buying homes.”
Conway noted that it naturally makes sense for many renters to turn toward the home-buying market once the gap between renting and buying a home closes. “Many renters stop renting and start buying when homes are more affordable and there is a small difference between renting and buying in the monthly payment,” she said. “In Riverside and San Bernardino, the monthly payment with a conventional loan for the median-priced home of $209,000 and $180,000, respectively, is close to the average rents of $900 to $1000 per month.”
While three of Southern California’s counties continue to struggle, two are emerging relatively unscathed, at least in terms of rental properties. This is again due to unemployment rates. San Diego’s unemployment rate is only slightly higher than the national average, at 8.8 percent, while Orange County’s rate is 7.8 percent. “Because the [unemployment] rates are lower, these markets are doing better,” Conway noted.
Despite the unemployment rate and faltering retail industry, rents in San Diego have actually grown by one percent, with a 95 percent occupancy rate. Conway attributed this buoyancy to the region’s technology and biotechnology sectors, as well as its strong universities and military presence, which provides a hefty number of renters. The average one-bedroom apartment in San Diego County went for $1,162 per month at the end of 2008, according to the Casden Forecast. San Diego rents are expected to increase by at least another one percent over the next two years.
In Orange County, a region with a relatively strong multifamily base, rents slipped two percent last year and are expected to experience another slight drop in 2009. This drop was significant for Orange County, considering it was the first time rents dipped in 13 years. Conway noted, however, that the region’s high home prices, tight lending environment, and many universities and medical facilities should help Orange County maintain a stable rental base.
