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Stagnant Rent Growth Forecast for Coastal Cities

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By Jorge Casuso

November 12, 2021 -- A report released this week by USC's Lusk Center for Real Estate forecasts a 1 percent decline in rent growth for coastal communities in an area that includes Santa Monica.

The Center's 2021 Spring Multifamily Report found a general shift in Southern California that saw renters move to outlying communities during the cornonavirus pandemic, driving up prices there and lowering vacancy rates.

"The farther one gets away from the city of Los Angeles, the greater seems to be the potential for rent growth," the forecast found.

"The model forecasts modest further rent declines from downtown Los Angeles moving west to the Pacific Ocean."

USC Study rent in coastal communities USC Study Vacancy Rate in Coastal Communities

The most substantial gains have been in the Inland Empire, followed by the southern end of Orange County, Ventura County and suburban San Diego, according to the report.

While a number of factors -- including the speed of recovery from the coronavirus pandemic -- remain murky, the report predicts the shift will begin reversing over the next two years.

By the third quarter in 2023, rents are forecast to increase by $252 a month in LA County, from the current $2,073.

The vacancy rate is expected to remain at 3.9 percent, according to the report based on data from CoStar Realty Information Inc. and the U.S. Census Bureau.

Driving the recent "large-scale move away from central cities to suburbs" was the coronavirus shutdown that allowed an unprecedented number of employees to work from home, the report found.

"The shuttering of office buildings and amenities such as restaurants reduced the willingness of tenants to pay a rent premium in centrally located places," the authors wrote.

"When commuting ceases to happen and places to gather are not available, renters will find less expensive, larger apartments in what are generally less convenient locations more appealing and will thus move."

The shift to telecommuting led to "a sharp rise in vacancy" in Downtown LA, Koreatown, Beverly Hills, Burbank-Glendale and coastal areas of LA County.

The trend was accompanied by "sharp declines" in vacancy in all Inland Empire markets, suburban San Diego County, Southern Orange County and Ventura County, according to the report.

Whether the pattern reverses itself and renters return from suburban cities back to central cities remains up in the air, the forecasters said.

If Los Angeles reaches herd immunity, "we may expect some, and perhaps substantial, reversal of the population flows from the central parts of the region to the more suburban parts," the report predicts.

"If this happens, we might see modest rent growth in central markets and slow rent growth at the periphery."

Also contributing to the rental trends is California's population loss, according to the report.

"For the first time since California became a state in 1850, California lost population," the forecasters wrote.

"This loss resulted from three elements: deaths from COVID, domestic outmigration and reduced international in-migration."

In addition, a decline in mortgage interest rates "made owner-occupied housing in the suburbs particularly appealing relative to renting in the city.

"So along with competing with suburban apartments, central city apartments were competing with the owner-occupied housing market," the report found.

This, however, could change as "prices have since risen to the point where the cost of owning is the same or higher than it was before COVID began."

What makes the forecast even less clear is the impact of the halt on evictions at different government levels that have "allowed tenants to remain in place" but in many cases owing substantial back rent.

Vacancy rates could increase if even a fraction of 459,000 households in Los Angeles and Orange Counties that reported in late April being, or about to be, behind on their rent or mortgage payment are evicted.

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