L.A. County Real Estate Activity from January 2005-March 2008 and Future Drivers of Real Estate Activity

Every year at this time, I gather extensive market research and information from Los Angeles County. This research gives the historical market dynamics and allows me to forecast the immediate future. Further, the research provides an accurate look at real estate on a national level and the future drivers of real estate activity.

The chart below shows the comparison of number of available properties on the market from 2005 to March 2008.

The chart below shows the comparison of closed multi-residential transactions in Los Angeles County from 2005 through March 2008.

In the first quarter of 2008, the number of transactions has decreased considerably from 2007. The 2008 graph indicates a 70% decrease in transaction velocity which is significant. Further, the average number of days on the market has increased over the last year by 40%. Despite the increased marketing time necessary to sell properties in today’s market, properties are still trading and values have remained relatively stable in prime areas.

This chart reflects the average sales prices from 2005 through March 2008. The average sales price was 13.1% less in March 2008 than in March 2007.

The average price per square foot has decreased since 2007 and the average price per unit decreased approximately $10,000 a unit in the 1st quarter of 2008 compared to the 4th quarter of 2007.

The GRM has increased in the first quarter of 2008 in comparison to the last quarter of 2007. This can most likely be attributed to the lack of desirable properties on the market and that there is still an overall demand for multi-family properties in areas with high occupancy rates and rental upside such as Santa Monica and the Westside.

In times of uncertainty, we are reminded that location plays a central component to the value of a particular asset. Investors are leery of properties located in inferior areas and the GRM and Cap Rates have been negatively affected in inferior located properties, especially in the last 12 months while properties located in superior locations have continued to trade at high multipliers on average. Additionally, location has become more of a significant component with lenders underwriting.

The chart below shows the CAP Rate trends from 2000 thorough March 2008.

The peak of the market occurred in mid-2005 and since then there has been a gradual softening of prices which has caused Cap Rates to rise to a current average of 5.4%.

I read a real estate article last month that put things into perspective for me and I wanted to share it with you. I found this especially important to share during the current time of transition in our markets. Real Estate has proven itself to outperform the Stock Market consistently as illustrated in the chart below for over a decade. Some good news for a change.

Despite all the grim news reports about our economy and the declining real estate values, I choose to look on the bright side. Regardless of whether we are in a recession or not there are significant drivers of activity in real estate to look forward to in the future such as:

• By 2030, the U.S. population will be nearly 400 Million.
  
• 29% of those will be living alone (only 9% of the population lived alone in the 1950’s)
  
• 35% of those will be in non-family households (only 11% of the population were in non-family households in the 1950’s)
  
• Full Time student population is growing to over 13.5 million by 2016 (Universities only supply 35% of their housing needs now)
  
• The Primary Renter Pool (18-34 years of age) is growing.
  
• 17.3 Million Potential new renters from 2010 to 2050.
  
• There is the emerging “Y Generation” of 75+ Million people.
  
• Emerging “Millennials” will be 48+ Million people.
  
• 74% of those 15-24 years old rent and 51% of those 25-34 years old rent.
  
• Expect dramatic growth around college towns and 24/7 cities.
  
• Age 60 and older population is growing significantly.
  
• 52.2 Million Potential new 60 + citizens between 2010and 2050.
  
• Life expectancy is now over 78 years old.
  
• Those over 75+ as a group will double by 2033 and triple by 2050.
  
• Huge increases in demand for age-based facilities and amenities.
  
• Average retirement age will be 67 years old by 2020.
  
• The Hispanic population is growing significantly.
  
• 54.8 Million New Hispanic citizens between 2010 to 2050.
  
• Hispanics will have $1 Trillion in purchasing power in the U.S. by 2010.
  
• 61% Hispanic population growth from 1990 to 2005.
  
• 54% of Hispanics are renters.
  
• U.S. Population continues to grow, nearly 100 Million more residents between 2010 and 2050 (64 jobs created for each 100 people)
  
• Jobs are still growing significantly and 47.8 Million new jobs will be created between 2010 and 2040.
  
• The Sunbelt will prosper the most in job growth creating 70%; the
• Pacific/Mountain regions will account for 24% of that job growth,
• Southeast region for 35% and the South Central region for 11%.
  
• U.S. Trade Rises, Imports from $500 Billion in 1990 to over $1,800 Billion now and Exports from $400 Billion in 1990 to over $1000 Billion today.
  
• From 2000 to 2030, the South (43M new people) and the West (28.9M new people) will have dramatic growth.
  

When looking ahead during turbulent and changing times, it is important to look at past trends and future drivers of activity in order to make intelligent and informed decisions about your investments.

“Leaders are those who can understand the implications of market shifts and emerging trends …and how to convert that knowledge into opportunities.”