A strong economy has led to increases in rental rates across all sectors of real estate, with no sign of stopping, according to economists and real estate experts. All sectors have seen decreases in vacancy rates and increases in pricing. The residential and industrial markets are particularly hot.
“For single-family housing in Los Angeles County, land is very limited so we don’t have a lot of new housing and supply is very limited,” UCLA Anderson Forecast Economist William Yu said. “By and large, the price is doing very well. Year-over-year, home prices increased 9.3% in Los Angeles. For Long Beach, it’s a little lower at 7.2% year-over-year.”
The median price for a single-family home in Long Beach is $640,000 according to local specialists, while condominiums saw a more than 20% growth in price over the past year, to $382,450. Home price growth has been higher for low-tier single-family homes and condos than high-end homes because fewer people are able to afford the more expensive homes, Yu explained. With low supply and high demand for less expensive homes, prices have been pushed up faster.
Home price appreciation has increased slightly, according to Christopher Thornberg, founding partner of Beacon Economics. However, he said rising interest rates would likely slow price appreciation but not stop it. The market shows no signs of a downturn and is not a bubble reminiscent of the pre-Great Recession market.
“Ten years ago, we had a housing market that was largely exploding because of all that crazy subprime mortgage cash. The housing market boom we’re seeing today is being driven by demand,” Thornberg said. “Mortgage lending is still relatively subdued and pace of sales is subdued. It’s just what we would expect given what incomes are doing and given the lack of new supply coming on.”
A booming economy with expanding businesses is good for housing, Thornberg explained. However, he said recent tax reform at the federal level has not yet impacted the economy or the housing market in any tangible way and won’t until at least next year. He said the likely impact on housing would be on high-end housing, as many of the tax breaks are for the wealthy. But his impact will be slight due to the fact that the wealthy most likely already own homes, he added.
“Housing markets are going to continue to move forward,” Thornberg said. “Obviously, housing shortages here in Southern California are a big problem because we’re running out of workers to fill all these job openings. But our lack of housing is ultimately good for housing values.”
Multifamily median rent in Los Angeles declined by 1.3% year over year, while Long Beach median rents declined by 3.1%, according to Yu. However, median rent per square footage actually increased in Los Angeles and Long Beach by 3.7% and 3.5%, respectively. To reconcile these contradictory facts, Yu explained that new product coming online in these areas are smaller in terms of square footage. He said this phenomenon should be good for the area’s housing affordability issues, allowing a larger group of people to find housing.
Despite thousands of multifamily units currently being under construction, Petra Durnin, CBRE’s Southern California director of research and analysis, said the housing shortage will persist. With demand showing no sign of slowing, rents are likely to continue to increase slowly, she added.
For commercial real estate, the growing economy means an increased demand for office space as businesses expand, Yu said. However, companies use far less square footage per employee in today’s market, and technology requires less space as well. Similar to the residential market, Thornberg said increasing interest rates will cool the commercial market off slightly.
“The numbers I see continue to show modest downward movement in vacancies. I think vacancy rates in office markets overall are still high,” Thornberg said. “But despite that, rents are going up at a good pace.”
The live-work-play mentality is becoming a large focus, tying residential, office and retail markets together, according to Durnin. As residential units are being built in urban areas, near office buildings, retailers are drawn in to service the new residents. There is an emphasis being put on placemaking, amenities and experiential retail to enhance live-work-play environments, Durnin explained.
With e-commerce still forcing change throughout the world of retail, many people focus on the negative implications that is having, Durnin explained. She said closing big-box stores and struggling traditional malls and shopping centers get all the attention but that the shift in retail actually opens up many opportunities to reposition mass amounts of property. There has already been a mass shift in desired tenancy to food and service-based businesses – those offering what cannot be obtained with the click of a mouse.
Yu agreed that the traditional state of retail is not performing well, even though vacancy rates are in the single digits. He noted that employment in the retail sector actually declined in the past year, which is odd in a time of economic expansion.
“With the rise of Amazon, the increase in online shopping really took a toll on traditional brick and mortar,” Yu said. “So it is in a transition period, trying to figure out how to win the customer back and compete with online shopping by offering this kind of new value-added activity. Some shopping centers are changing to multifamily apartments with mixed use – apartments, restaurants and office are the future. We are seeing that change in direction already.”
What is bad for retail is good for industrial real estate, as increased e-commerce increases demand for third-party logistics companies. Durnin noted that the retail and industrial sectors have not evolved in decades and that it is interesting to watch them change in concert due to the same underlying factor.
The vacancy rate for industrial space in Los Angeles County is 1.3%, a level it has been at for some time, according to Yu. With ever-persistent demand, he said upward pressure on lease rates could bring them upward of $1 per square foot. Thornberg said there are numerous projects to develop additional industrial space in the county but that, with as strong as demand is, there is no reason to believe the sector is being overbuilt.
“Chronologically, we are most of the way through this current economic cycle but if you look at all the market fundamentals, we’re still in a very strong position across Southern California,” Durnin said. “There is no softening of rents yet – there may be stabilizing in some pockets but that’s not a softening. There may be a leveling off of some vacancy rates but, if you scratch the surface a little more, that could be because there have been more deliveries. We just haven’t had a mass event that would indicate something is coming yet.”