Executive Summary
Marcus & Millichap
Winter 2004

•Employment growth for the year is expected to reach 1 percent, again of 41,000 jobs.

•The apartment market is benefiting from rising home prices. Over the past 12 months, the median single-family home price has increased 23 percent to $460,000.

•Developers are on track to complete a total of 5,400 units in 2004, down from 5,800 units last year.

•Renter demand is strong due to the declining housing affordability rate and population growth. Vacancy is forecast to end the year down 40 basis points when compared to 2003, at 3.2 percent.

•Tight market conditions will allow owners to push the average asking rent to $1,219 per month by year end, a 5 percent increase from 2003.

•Rising interest rates may slow investment activity, but strong fundamentals will keep prices moving upward.

Economic improvement and out-of-reach home prices are tenant demand for Los Angeles apartments, which clearly tips the rental scale in favor of owners. Tightening market conditions have allowed owners to become more aggressive with rent growth, which slowed in previous years due to economic weakness and the migration of many residents to homeownership. Jobs are returning to the market and fueling housing demand, but rental housing is expected to benefit the most given the declining number of residents able to purchase a home. Sales activity has been brisk due to low interest rates and investors motivated by strong fundamentals. While price appreciation is slowing, the lack of new supply and growing demand will prevent downward price correction.

LOS ANGELES APARTMENT INVESTMENT ACTIVITY REMAINS BRISK

Economic improvement, coupled with exorbitant home prices, is fueling demand for rental housing, and the local apartment market is becoming extremely tight. As a result, owners have become increasingly confident that rents can be raised with little risk to occupancy, which will lead to more aggressive rent growth over the next year. Sales activity has started to slow, though, as some buyers have become concerned over rising interest rates and the effect it will have on values. Nonetheless, strengthening fundamentals have kept most apartment buyers motivated, which will continue to put upward pressure on prices.

Housing Affordability Becoming a Problem for the Region
Numerous low-income housing projects are in the works, but the number of units slated for completion will fail to accommodate the growing group of families that qualify. Fewer than 1,500 affordable units are currently under way, yet the population is expected to grow by 100,000 residents this year. The recent spurt in home prices, which dropped the housing affordability rate to a record-low 17 percent by midyear, ensures that most people entering the county will not be able to buy a home. Since most new residents will be forced to seek rental housing, the apartment market will benefit from increased demand. This will lead to further declines in vacancy.

Developers Getting Creative Due to Land Constraints
The limited availability of developable land has forced apartment developers to get more creative. Some are now resorting to locations that previously would not have been considered appropriate for luxury multi-family projects. The most recent example is a 347-unit complex that is being built along and above train tracks in Old Town Pasadena. Lennar Corporation, among other builders, is also experimenting with the concept. Lennar is building a condominium complex in Santa Ana across from railroad tracks. These developers are confident that there will be sufficient demand to fill units, as the location affords residents the ability to easily travel by rail to work.