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LOS ANGELES-Despite the downturn in the local single-family market–or, perhaps, thanks to it–building owners throughout Southern California can expect to see rental rates tick up modestly this year. The average increase, reports the University of Southern California Lusk Center for Real Estate’s Casden Real Estate Economics Forecast, will range from 2.5% to 3%. Meanwhile, occupancies will remain stable at 96% to 97%.

“As long as job losses aren’t too severe, the Southern California apartment market is poised to weather the housing downturn and credit crunch,” says Delores Conway, director of the Casden forecast, which provides analyses of multifamily transactions, new building permits, leasing activity and employment data for Los Angeles, Orange, Riverside and San Bernardino counties. “Renting remains attractive when mortgages are harder to obtain for high-priced homes. Although the national economy is skating close to a recession, the apartment market is supported by demand for trade, regional economic strength and higher paying jobs in healthcare and professional services.”

Although employment is down now, Conway anticipates job growth to pick up later this year, particularly in healthcare, business and professional services sectors as well as international trade, which bodes well for the region’s multifamily sector. However if the economy stumbles and falls into a severe or prolonged recession, she adds the “generally stable” outlook would certainly change.

In Los Angeles, where the median home price is $460,000 and lending standards have tightened, Conway says apartments are a more realistic housing alternative for many households. The already high occupancy rate in the county is expected to dip a bit due to new completions of roughly one million units and the shadow market of unsold condominium units.

Still, rents should remain stable or even see increases of 2.5% to 3% since owners tend to offer concessions before they push prices down in an effort to build occupancy. With the new units and some condominium reversions, Conway says renters will have a plethora of choices.

The current average monthly rent in Los Angeles, $1,580, is the third highest in the entire state, trailing only San Francisco and San Jose. Rents will probably see higher increases on Los Angeles’ Westside, Hollywood, Pasadena, Burbank and Long Beach due to the level of demand.

Meanwhile, Conway says don’t expect to see Orange County repeat the wave of rent hikes it saw in 2007. Rates in the market rose 4% in 2007 despite job losses in the mortgage industry and 6% in South Orange County alone. Yet for 2008, Conway points out the overall outlook for the area is “somewhat cautious” as the market adjusts to the job losses in financial services and real estate industries.

On the plus side, employment growth in the health services, leisure and hospitality sectors are buoying demand for apartments. Further, the pool of skilled workers in Orange County is on the rise, attracting even more employers. With an average monthly rent of $1,550, the region is attractive to renters compared to other areas of Southern California, Conway concludes.

Like Los Angeles, rents in Orange County are slated to rise 2.5% to 3% this year, with higher increases in limited-supply areas like Buena Park and North Orange County. Conversely, deliveries in the Irvine and Newport Beach submarkets and, to an extent, Anaheim, should cause occupancies to soften a bit, leading to flat rent growth.

“We expect rent increases within the submarkets to follow the overall trend of higher rents for Orange County, but at a slowed pace,” Conway says. “Rents may have gotten ahead of themselves for the short term as the market adjusts to the housing slowdown.”

And in the Inland Empire, the bust in the for-sale housing market has impacted that area, resulting in a large inventory of available homes. However, Conway says a lack of services for the growing local population is causing a number of related firms to enter Riverside and San Bernardino counties, particularly among for-profit educational institutions, accountants, attorneys, financial service providers and other professionals. Those businesses will bring even more demand for apartments.

Inland Empire’s demand, however, will be offset by new deliveries. Although construction has slowed this year, 3,234 new units were put into the market in 2007. Absorption potentially will slow in the near term yet it should remain in positive territory, Conway says, adding it will lead to stable rents and occupancies above 95%. At $1,104 per month for the average rental rate, the Inland Empire provides an affordable alternative to home ownership. Overall, a 2% to 2.5% uptick is projected for annual rents, with higher increases in strong submarkets with limited supply, including Ontario, Southwest Riverside and San Bernardino.

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