Apartment rents climb 6% in California : QC IMC

Apartment rents climb 6% in California as they play catch-up with sale prices.

By Annette Haddad
Times Staff Writer

October 19, 2006

Playing catch-up with the recent run-up in home prices, rents in large apartment complexes posted strong gains across California in the third quarter, according to data to be released today.

Rents rose an average of 6% in most of the state's biggest markets, Novato, Calif.-based research firm RealFacts said. Southern California remained the West's most expensive place to rent, and the San Francisco Bay Area saw the highest rent increases, RealFacts said.

The rental market is likely to tighten further with the state's stable job market attracting more people to move here, although rising rents could slow economic growth, analysts say.

"We have no trouble finding tenants," said Rafael Padilla, a commercial property broker who owns about 35 apartment units in West Los Angeles. "The influx of people is still tremendous. If I lose one tenant, there are three more behind them."

The average rent in Los Angeles and Orange counties rose 7.4% to $1,546 during the third quarter, making the counties the most expensive among 28 Western markets, said RealFacts, which surveyed 12,000 apartment buildings of 100 or more units in 15 states.

Rents increased 7.6% to an average of $1,452 in Ventura County. The Inland Empire is becoming more of a landlord's market as well, with rents in Riverside and San Bernardino counties rising 6% to $1,129.

In Silicon Valley, the average rent jumped 10.4% to $1,450, the first double-digit increase in the high-tech heartland since the end of the dot-com boom in early 2001. Then, Santa Clara County's average rent peaked at $1,959.

For all of Southern California, occupancy rose 0.4 percentage point from a year earlier to 96.2%. RealFacts analyst Chris Bates said occupancy above 96% was generally considered fully occupied — meaning that renters were having increasing difficulty finding vacancies.

Economists point out that Southland rents are in some ways playing catch-up with the recent run-up in home prices. During the housing boom — when rock-bottom interest rates made taking on a mortgage as affordable as renting for many people — landlords had a higher rate of tenant turnover.

Now, the housing boom is over, with the slowdown expected to continue next year, according to a new forecast by the state's real estate agents. The median price of an existing California home will decline 2% to $550,000 in 2007 from a projected median price of $561,000 this year, according to the California Assn. of Realtors. Sales are projected to decline 7% to 447,500 units from 481,200 this year.

The group also predicted that the rate on a 30-year fixed mortgage will tick up to 6.7% next year from a projected 6.5% in 2006.

"The housing market clearly downshifted in 2006 from the record-setting sales and robust price gains of the last few years," said Vince Malta, president of the Realtors group.

But just as home price gains are disappearing, soaring rental prices are causing concern.

"Housing costs in Southern California have become an issue for economic growth," said Anil Puri, dean of Cal State Fullerton's College of Business and Economics. "Southern California is a desirable place to live, but higher housing expenses could come to impact this area."

Higher rents are also a symptom of supply and demand, said Edward Leamer, an economist and director of the UCLA Anderson Forecast. Despite a building boom in the last few years, there remain too few units available to meet demand.

Although still inadequate, the supply of rental units is increasing partly because of the growing number of mom-and-pop investors who leveraged the equity earned in the housing boom to purchase additional real estate, said Anthony Yannatta, director of corporate development at Westside Rentals, a Santa Monica rental listings firm whose primary business is from individual owners of income property.

"We're seeing a lot more smaller investors listing now," Yannatta said. "We're also seeing owners who are trying to sell but don't want to take a price reduction, so they are willing to wait and rent their place out in the meantime."

Yet the housing slowdown is crimping equity gains for many newer property owners who bought when values were at record highs. These owners are faced with pushing rents as high as they can to help cover ownership costs, said Lal Akatrai, a Long Beach-based investment property broker.

At some point, it may be hard for landlords to continue raising rents at the same rate and still attract renters.

"Something has to give," Akatrai said. "I don't know what will give first, landlords holding off on rent increases or simply selling their buildings."

Landlords managing smaller buildings are raising rents too, data showed. From July to September, rents at small apartment buildings, condominiums and single-family houses in Santa Monica, Brentwood and neighboring communities rose on average 7.2% to $2,386 a month, Westside Rentals said. In south Orange County coastal cities, rents rose 0.3% to $2,741 in the same period, the firm said.

Rents declined in just two of the 20 Western markets surveyed by RealFacts: Colorado Springs, Colo., down 0.3% to $708, and Boise, Idaho, down 0.1% to $703.

Tucson offered the West's lowest apartment rents at $647, a 4.7% increase from a year earlier.