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Multifamily rents are on track to rise throughout Southern California over the next two years, and that could spell new troubles for commercial real estate financing, according to the University of Southern California’s Lusk Center for Real Estate.
The 2023 USC Casden Real Estate Economics Forecast assesses market conditions and makes two-year projections for multifamily rents and vacancies. This year the forecast also looked at how high interest rates, migration and financing affect the future of housing in Southern California.
“For now, rent growth will be somewhat moderate,” said Moussa Diop, associate professor of real estate at the USC Sol Price School of Public Policy and author of the forecast. “What’s concerning is the coming tidal wave of maturing debt in commercial real estate. Refinancing loans at nearly double the original interest rates will be difficult.
“Adding housing supply is one of the only reliable ways to ease rent burden. It’s near impossible to significantly add housing if builders can’t finance projects or they have properties nearing default,” Diop added. “It may be a lose-lose situation for renters and landlords.”
The forecast describes outmigration and the region’s persistent housing shortage as weathervanes signaling a “region that is missing the mark for livability.” Between 2020 and 2022, California lost 510,000 residents, or 1.3 percent, which is larger than the population of Atlanta. High interest rates have stymied the development of new housing, and surging operating expenses have blunted owners’ capacity to save for the upcoming debt wave, and making owners unable to grow.
“Renters will see the worst of this, though the effect will be delayed,” Diop said. “As the industry takes time to sort out financing, new supply will dip lower and lower. By the time momentum returns in a couple years, more damage will be done. Vacancy will drop, and rents will climb. This is how we lose even more residents to nearby states. Renters in Southern California can’t afford a dip in production.”
Los Angeles County is facing a chronic rental housing shortage and it’s losing the most residents of the five regions in Southern California, USC found. According to the latest 2021 migration data, L.A. County lost a net 146,500 residents, about the size of Fullerton, Calif.
High mortgage rates are discouraging new construction, as multifamily permits in L.A. County dropped 13 percent in 2023. In the coming 24 months, USC’s report projects slower average rent growth at 2 percent per year, up to $2,306 per month by October 2025, with a vacancy rate descending slightly to 4.5 percent.
While funding from Measure ULA supports efforts to increase affordable housing and fight homelessness, the additional transfer tax on any property sold above $5 million may have net negative effects on L.A., according to the USC forecast. Buyers and developers could pass those additional costs to tenants while developers might avoid the city outright, further exacerbating the constrained availability.
Meanwhile, Orange County hosts one of the strongest, most well-diversified economies in the country, per USC. Median household income rose by 3.2 percent over the last two years to $101,551 with an unemployment rate at 3.9 percent, below the state’s average of 4.9 percent.
But Orange County is also not building enough housing to meet demand, causing the highest projected average rent growth rate for Southern California over the next two years at 4 percent. That will put rent at $2,837 per month in October 2025.
Meanwhile, the Inland Empire has experienced strong economic growth propelled by the pandemic’s e-commerce surge and rapid expansion of the industrial real estate sector. Thus, the region “consistently siphons population from expensive coastal counties,” USC report reads.
Rents are cooling from their pandemic spike with a competitive average rent of $2,000 per month in the second and third quarters of this year. Multifamily development is increasing, up 85 percent this year, and USC projects less than 2 percent annual rent growth, keeping the Inland Empire as an attractive destination for renters.
Gregory Cornfield can be reached at gcornfield@commercialobserver.com.
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