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UCLA BULLISH ON RENTAL MARKET NO BUBBLE SEEN FOR APARTMENTS.

Byline: Gregory J. Wilcox Staff Writer

Southern California will remain an attractive market for investors in apartment complexes and the rapid appreciation of these properties has not formed a ``bubble'' says a UCLA forecast to be released today.

``We think the long-term demographic trends are very favorable for Southern California apartments,'' said Stephen D. Cauley, associate director of the Ziman Center for Real Estate at the University of California, Los Angeles.

Cauley will present his forecast today at the center's annual multifamily housing conference at the Skirball Cultural Center in Los Angeles.

This past year, the market featured rapid price appreciation with per-unit costs increasing by 20 percent in Los Angeles, Orange and San Diego counties and the Inland Empire. That rate is expected to slow this year, he said.

These increases came at a time of modest rent gains. Cauley poses the question: Do these price increases, coupled with declines in capitalization rates, pose a bubble?

``We think not,'' he states.

During the past year, the yield-to-maturity ratio on one of Moody's bond indexes fell 170 basis points, matching the capitalization rate. (The capitalization rate is the rate of interest used to convert a series of future payments into a single present value.)

Cauley believes that, given the current interest rate environment, cap rates are consistent with long-term growth of between 3 percent and 4 percent in rents.

Unanticipated increases in interest rates are considered a short-term risk, he said.

But the long-term outlook is favorable. And it has a dark side.

Cauley notes that Southern California will see sustained growth of that part of the population that demands apartments - low-income wage earners and young, educated professionals entering the work place.

Supplies are improving and 2003 is expected to be the best for apartment construction in 14 years. It still won't meet demand, though.

And what is being built is targeted at the affluent end of the income scale. They eventually move onto home ownership.

``I would say the market is going to provide apartments for the younger professionals. It's not going to provide it for sort of the lower middle class,'' he said. ``The lower middle class is going to sort of be stuck renting for the rest of their lives.''

That's not surprising.

On Tuesday, the National Low Income Housing Coalition released a study showing that the housing wage - what it takes to afford to rent a two-bedroom unit costing $1,021 a month - in Los Angeles this year is $19.63 an hour, up from $16.63 a year ago. The minimum wage here is $6.75. The housing wage is the amount a person working full time has to earn to afford a two-bedroom rental unit at fair market rent with no more than 30 percent of the income being spent on shelter.

Last month, Marcus & Millichap Real Estate Investment Brokerage Co. issued a report noting that rising home prices throughout Los Angeles are locking a larger share of the tenant pool into the rental market.

This has allowed the region's apartment market to maintain high demand and low vacancies over the national economic downturn.

And this is not likely to change, said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp.

He believes that interest rates won't shoot up, so opportunity still exists in this market.

``If you're a savvy investor, you would go out looking for apartment buildings that might not have much curb appeal. But if you can get it at a good deal and fix it up and it's in an area that would be attractive to first-time renters, you would probably do quite well for yourself,'' Kyser said.

Gregory J. Wilcox, (818) 713-3743

greg.wilcox(at)dailynews.com
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Title Annotation:Business
Publication:Daily News (Los Angeles, CA)
Article Type:Statistical Data Included
Date:Sep 10, 2003
Words:621
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