Apartment Boom Nears Its End

LOS ANGELES—Senior housing economist David Shulman published an economic letter in the UCLA Ziman Center for Real Estate with some compelling observations about the home market. Most notably, Schulman predicts that the apartment boom will start to see strain by the end of 2016 as the homeownership market picks up and puts downward pressure on rents. He expects new construction levels to negatively impact apartment vacancies.

“Our guess is that the old average of 1.5 million units will be the new peak in the coming years. Longer-term demographics and affordability issues are beginning to work against the demand for housing,” Shulman tells GlobeSt.com. “With developers building for the top of the market for high-income renters, they may not yet to be cognizant of this trend, but they will soon find out that the high-end apartment market might not be as deep as they think.”

However, that doesn't mean that the boom is ending now. Shulman's predictions also said that the sector “still has room to boom” over the next two years, with an average of 460,000 unit starts annually during that time and rents increasing by 3.5%, according to the official poll, and 4.5% to 5%, according to the public REITS. “The official data tends to lag the actual marketplace because of the prevalence of rent-controlled jurisdictions in the official sample,” says Schulman.

Shulman's five-point predictions also included predictions that millennials will begin buying homes again; higher mortgage rates are coming, but will not meaningfully cut into housing activity until 2017; and traditional homebuilders will develop single-family, for-rent residences. “A year ago we were too optimistic about 2015 thinking that this would be the year we would approach 1.4 million units,” he adds. “Although the data disappointed us earlier in the year, the recent data, which shows 1.2 million starts in September, indicates we are on track for 1.4 million units in 2016. It looks like demographics, jobs and interest rates and credit conditions are coming together to make for a good housing environment.”

While these are national housing trends, we have seen some evidence of millennial-focused housing start-ups in Los Angeles. In Hollywood, for example, Metro Investments and P. Joseph Development is building a boutique home community in Hollywood under the city's small lot ordinance. Named Fountain + Gower after its location, the property will have 11 for-sale detached homes targeting millennial buyers.