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California Multifamily Forecast

by Scott Donald, Irvine, January 2017

 

Optimism among California multifamily developers has remained strong for the past few years and the forecast for 2017 is no different. Higher rents and continued low vacancy rates are expected to drive an increase in multifamily construction with a 25-year high being reached in the next three years. While the market expansion is good news for developers, property tax planning will be necessary to mitigate an increasing tax burden.

 

Job Growth Fuels Demand

 

Employment in California is forecast to grow at a 1.8% rate through 2017. The demand for multifamily housing tends to follow job growth in the more densely populated regions of California. Therefore, markets should tighten in the Silicon Valley, San Diego, and the San Francisco markets, according to the Allen Matkins UCLA Anderson Forecast Commercial Real Estate Survey.

 

One market that is different is Los Angeles, where the vacancy rate is expected to increase over the next three years even as real rental rates continue to rise.

 

Construction Continues

 

While overall residential construction has remained at depressed levels in California, multifamily construction has rebounded sharply. Two years ago, the number of multifamily permits issued in the state per month rose to pre-recession levels.

 

In its report on the 2017-2018 Budget - California Fiscal Outlook, the California Legislative Analyst's Office estimates there will be approximately 48,000 new multifamily permits issued annually in 2017 and 2018. This is based on a consensus of economists about the likely trends as reported by Moody's Analytics.

 

The Impact on Property Taxes

 

In tight markets with continued growth like the Silicon Valley, continued vigilance is required. Property taxes are a major budgetary expense so there must be a focus on active assets as well as planning for those coming online.

 

Multifamily was the first commercial product to rebound from the market crash several years ago and it continues to perform well. But there are some chinks in the armor as investor yields are being squeezed to historically low returns. Other investment opportunities such as the stock and bond markets afford alternative vehicles to provide higher returns. A change in the political climate along with some markets starting to become saturated could lead to possible bloating within. Understanding your property taxes today and focusing on tomorrow minimizes unpleasant surprises.