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California Apartment Renters, Landlords Face ‘Lose-Lose’ Situation, Report Says

Rent Increases, Financing Difficulties Expected To Plague Market

California Apartment Renters, Landlords

An apartment project is under construction at 6600 Van Nuys Blvd. in Los Angeles. (CoStar)

By Jack Witthaus

CoStar News

November 15, 2023 | 3:25 P.M.

Apartment renters and owners are expected to face financial hurdles in the years ahead in Southern California, according to a new report.

The outlook comes as the national multifamily market is contending with high interest rates that have curtailed new projects.

Rent increases are expected across Southern California from Ventura to San Diego counties over the next two years while high interest rates threaten apartment owners and developers who need financing, according to the University of Southern California's annual multifamily forecast.

Apartment construction has fallen 11.3% year over year around the United States in response to higher interest rates, according to CoStar data. Construction is critical in housing-constrained markets such as Southern California as adding supply is the only reliable way to ease rent costs, Moussa Diop, a USC associate professor of real estate, said in a statement.

"It’s near impossible to significantly add housing if builders can’t finance projects or they have properties nearing default," Diop said in the statement. "It may be a lose-lose situation for renters and landlords.”

Multifamily developers in Southern California may struggle to keep apartment construction projects going if they aren't able to lock in favorable financing, Diop said in the statement. Property foreclosures also may rise if interest rates stay high, Diop said.

In response, new apartment supply is expected to dip in Southern California, resulting in falling vacancy and higher rents.

That trend may be felt nationally, too, with apartment unit completions falling through 2026 before rebounding in 2027, according to CoStar data. Across the country, apartment construction starts peaked at a 10-year high in 2022 before falling to 76,109 starts in the third quarter, the lowest quarterly figure since 2012.

Renters in high-cost cities may be forced to leave in response to rising interest rates — a trend that has already happened in parts of Southern California, according to the USC study. Los Angeles County lost a net 146,500 residents as of 2021, the report said.

Rising rents are "how we lose even more residents to nearby states," Diop said in the statement. "Renters in Southern California can’t afford a dip in production.”

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