Irvine resident Mike Meservey thought he would find a bargain when he saw all the new apartments being built along Jamboree Road.
Developers must be desperate to fill all these new buildings, he figured. And they must be offering deals.
Turns out, nothing could be further from the truth. As a result, Meservey and his wife, Rose, are staying put in the Irvine condo they’re renting for $2,000 a month.
“They’re building tons of stuff. They just keep building and building,” said Meservey, 58, a retired plant manager. “But they call them luxury apartments and charge $3,000 a month.”
Irvine isn’t alone.
Southern California — and the nation as a whole — is experiencing the biggest apartment construction boom in a quarter century.
In the last 34 months alone, new apartments have been springing up from San Clemente to Sylmar, from Murrieta to Marina del Rey.
More than 37,000 new apartments have been built in the region since the start of 2015, data from commercial real estate tracker CoStar show. More than 36,000 more are under construction.
CoStar projects Southern California is on track to complete 15,000 new apartments this year and 23,000 more in 2018. Developers in the region have added almost 65,000 new homes to the local housing stock since the recovery began in 2012 — a gain of almost 2 percent.
It’s the most construction in the region since at least 1991, according to Reis Inc., a market data firm.
And it’s happening across the country. U.S. developers are on track this year to complete at least 350,000 new apartments, the most since the late 1980s, according to rental data firm RealPage Inc.
“This is the biggest number we’ve seen in a long time,” said Mark Obrinsky, chief economist for the National Multifamily Housing Council. “Demand ran ahead of supply, and supply is starting to play catch-up.”
So, after seven years of galloping rents and low vacancies, are tenants finally going to get a break? Is there an apartment glut that will trigger a round of rent cuts?
In a word, experts say, no.
If anything, developers still aren’t building enough.
There might be some saturation in a few areas, like in downtown Los Angeles, where rent hikes have slowed.
And because most of all this new construction is for luxury apartments, there’s very little that’s affordable to middle- and low-income workers.
“We do see that the pace of rent growth is starting to slow,” said Greg Willett, RealPage chief economist. “But (rent growth) still is solidly positive.”
Rentership society
What’s driving this boom?
The number of renters has been soaring since the housing bubble burst in 2007.
Southern California had 128,000 fewer homeowners last year than in 2007, a 4 percent drop, according to U.S. Census Bureau figures. During the same period, the region added 414,000 new renter households, a 17 percent gain.
Almost half of all Southern California households are renters. As a result, demand is up, rents increased by at least 23 percent since 2010, and vacancies fell to 3 percent in some areas, Reis figures show.
Experts say demographics are driving this trend.
Thanks to steady job growth, a lot of millennials are moving out on their own, and they tend to rent, experts say. At the same time, homeownership is closed off to many, either because of high home prices, tight lending practices or student debt.
“A lot of people want to buy homes, but can’t or can’t get money from the bank,” said Jerry Fink, a co-founder of apartment investor The Bascom Group. “Apartments are the main beneficiary of that demand.”
A National Multifamily Housing Council study released in June also found millennials are delaying key triggers for becoming a homeowner: marriage and having children. The study also found aging boomers and immigrants are swelling the ranks of renters.
The success developers had with new apartments in 2014 and 2015 spurred even more construction, said Barbara Denham, Reis senior economist.
“The economics supported this idea that if you build new units, people will fill them,” Denham said.
L.A. explosion
Los Angeles County dominates the apartment boom, accounting for 415 out of 529 new Southern California complexes built or under construction during the past 34 months, CoStar data show. Of the 73,000 new apartments, almost 49,000 — two-thirds — are in Los Angeles County.
Forty-two percent of new apartments are cropping up in a 10-by-13-mile swath on the West Side stretching from Silicon Beach to the 101 freeway downtown.
Orange County accounts for 81 projects with just over 20,000 new apartments or a little more than a fourth of the total. A third of Orange County’s new units are in the city of Irvine, Southern California’s second-busiest city for apartment construction.
The Inland Empire lags its coastal neighbors. It has just 33 new buildings, with 4,838 new units — much of it clustered in the Riverside-Corona area and the Chino-Chino Hills area.
Los Angeles County ranks seventh among the top U.S. metro areas in apartment construction from 2010 through mid-2017, according to RealPage. Houston and Dallas lead the nation, however, with almost twice as many new apartments as L.A. County.
Indeed, the pace of construction here is much less dramatic than in many smaller cities like Washington, D.C., Seattle and Austin, which all have built more apartments than L.A.
“People in L.A. are going, ‘Oh, my gosh, we’ve got a lot of construction going on,’ ” said Jay Lybik, vice president of research services for commercial real estate brokerage Marcus & Millichap. “Yeah, you’ve got a lot going on, (but) given the size of the metro and the population growth and the household growth, you can almost make the argument the region is incredibly under-housed.”
Complete mismatch
Most of this new development comes at a high cost.
Only 7,800 of the new apartments — 11 percent — are affordable units, limited to low- and moderate-income tenants. The average rent for those units is $1,842 a month.
The average rent for the 66,000 “market-rate” apartments exceeds $2,800 a month, with rents topping $15,000 per month at one Century City complex.
“There seems to be a lot of supply of housing, but it’s not at all income levels,” said Cesar Covarrubias, executive director of the Kennedy Commission, an affordable housing advocate. Most new jobs, meanwhile, are at the opposite end of the income spectrum.
“There seems to be a complete mismatch between the housing supply and the type of jobs that are growing,” he said.
Without subsidies, however, affordable housing doesn’t pencil out, developers say.
“It cost near as much to build affordable as luxury,” said Fink, of the Bascom Group. “Whether you’re affordable or luxury, the land costs are the same. Materials are almost the same. … You have to build luxury and charge luxury rents or it’s not feasible to build the building.”
Will new construction at the high end help low- and moderate-income tenants?
Opinions vary.
Industry professionals and economists say construction of more Class A apartments will increase the availability of Class B and C buildings, creating more vacancies — and smaller rent hikes — at the low end.
“Building new apartments helps the overall market,” said Mark Asturias, executive director of the Irvine Community Land Trust, a nonprofit affordable housing organization.
But the key, said Asturias and other affordable-housing advocates, is construction “at all income levels.”
“I am not a believer in the trickle-down theory of real estate, and there is data to support this position,” said Alan Greenlee, executive director of the Southern California Association of Non-Profit Housing. “I don’t see how building solely for the high end relieves pressure on the lower part of the market.”
Downtown glut
The 700-unit Eighth & Grand apartments cover almost an entire city block in downtown Los Angeles, with a bank and Whole Foods Market on the ground floor and two-bedroom rents as high as $4,100 a month. It has a lobby cafe, a roof-top pool and spa and a home theater.
It’s one of 42 complexes built or under construction in the 5 square miles that make up downtown Los Angeles. In all, 12,000 new units have been built or are under construction there.
“More people want to live in urban areas,” said Denham, the Reis economist. “People (downtown) are enjoying the freedom to walk to work or go to restaurants after work.”
But all that construction is having an impact on downtown rents and lease-up rates, said Willett, RealPage’s chief economist.
“We’re at the point where we’re starting to see (decreased rent hikes) in downtown, along the Wilshire Boulevard corridor and Hollywood,” Willett said. “You’re not cutting rents, but you’ve slowed the pace of growth because of what’s happening downtown.”
Still, industry insiders and economists say the Southern California housing shortage is so severe that current construction may just be a drop in the bucket.
The Los Angeles metro area will need 164,000 new apartments by 2030, according to the study released in June by the National Multifamily Housing Council.
“Are they building a lot in certain submarkets? Yes. Is it a little soft? Yes,” said Fink, whose company is working on two downtown L.A. projects. “Are they going to continue to be soft in the long term? No.”
Fink acknowledged that concessions, such as a free month’s rent or gift cards, are commonplace, especially in places like downtown Los Angeles. But that’s typical for all new developments, he said.
“Pretty much all new buildings offer concessions because they want to lease-up quickly,” Fink said.
On the flip side, most new buildings are filling up. Fink said lease rates of 20 to 30 units a month are common.
The George, a partially completed 340-unit building on the edge of Anaheim’s Angel Stadium, had no trouble signing 60 new tenants during its first two months despite rents in the $2,015 to 3,900 a month range, said property manager Trent Borts.
The luxury building has a coffee lounge, a pet spa, and a roof-top pool deck featuring a giant outdoor TV, a self-service beer garden and views of Angel and Disney fireworks shows. New tenants, including a couple of Angels team members, get their third month rent free.
“We don’t need to offer a lot of concessions,” Borts said. “We don’t have to lower our price.”
Produce importer Domingo Kaskas became one of The George’s first tenants, paying $2,400 a month for a one-bedroom unit. The location is convenient for him. It takes just 25 minutes to reach the downtown L.A. produce market at 4 a.m. And he likes the amenities.
“(It’s) very appealing,” Kaskas, 27, said. “The staff is wonderful here. The amenities are over the top. … It’s worth the extra couple hundred bucks.”
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