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Apartment boom has room to run, UCLA report says

August 19, 2012|By Roger Vincent
  • A 700-unit, $300-million apartment complex planned for 8th Street between Grand Avenue and Olive Street in downtown Los Angeles.
A 700-unit, $300-million apartment complex planned for 8th Street between… (Astani Enterprises )

The apartment construction boom sweeping Southern California and other parts of the country has about two more years to go before playing itself out, a UCLA report said.

Developers are responding to the collapse of the single-family housing market in the recent economic downturn. It prompted increased demand for rental units as some homeowners lost their property and potential buyers retreated from the volatile market.

Many investors perceive apartments as a safe, potentially lucrative investment, said the report from the UCLA Ziman Center for Real Estate. With 10-year Treasury bond yields below 2%, institutional investors are seeking higher yielding alternatives. Climbing rents offer the prospect of higher future income and capital appreciation.

“Of course this boom in multifamily construction will have within it the seeds of its own destruction,” UCLA economist David Shulman said. “As rents rise, consumers will shift out of rental into ownership units.”

By 2014, supply will begin to outpace demand, the report said. Competition will include existing single family homes that are being turned into rental properties by a growing number of investment groups. As the costs of buying and renting come closer to each other, more people will opt to own their residences.

“The American Dream of homeownership may be comatose, but it is not dead,” Shulman said, “and the wake-up call will come in the form of higher rents.”

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