By Paul Feinberg
The UCLA Anderson Forecast sustained an optimistic theme throughout the September edition of its quarterly conference. The positive economic feelings began with the presentation of the national and California forecasts, presented by Forecast Director Ed Leamer and Senior Economist Jerry Nickelsburg respectively, and a keynote address from Dr. John C. Williams, president and CEO, Federal Reserve Bank of San Francisco.
Following the keynote from Williams, real estate became the theme of the day with a set of talks from John Tipton, operating partner of the Law Firm of Allen Matkins; David Shulman, UCLA Anderson Forecast senior economist; and William Yu, UCLA Anderson Forecast economist. After a brief discussion of positive trends in commercial real estate — rooted in across-the-board developer optimism — Tipton spoke of the current Allen Matkins UCLA Multi Family Market Outlook that showed strong developer optimism in every sector. Tipton also noted that low vacancy rates supported the rental rate increases being seen.
Shulman examined the national real estate markets. He and the Forecast economists are predicting that housing starts are “on the road to 1.4 million per year in 2016,” up from 1.14 million in 2015 and just 1 million in 2014. While housing starts will approach 1.5 million, this total remains well below the 2 million starts the nation saw at peak before the last recession.
Yu looked at the relationship between the Chinese economy and Los Angeles’ economy and housing market. Yu said that China’s economy is in more trouble than that government is letting on, noting that both China’s housing sector and stock market are “in trouble.” The volatility in China’s economy actually leads to greater investment in the U.S., investments that should produce higher, risk-adjusted returns. Chinese economic turmoil might impact exports and tourism in Los Angeles, but investment in L.A. real estate will persist. Also, Yu said that Los Angeles’ housing market is not in a bubble and that a bear housing market will not manifest this year or next.
Two invited panels drilled down to questions about California’s housing market and the future of mortgage finance — namely, whether we’ll start seeing more of what Stuart Gabriel, faculty director of the UCLA Ziman Center for Real Estate, called new instruments for origination and securitization. Shawn Miller, CEO of 5AFC and its parent company 5 Arches LLC, lends to residential investors, including fix-and-flip clients interested in expedient movement of capital. “The oxygen for real estate is financing,” said Miller. He added, “My gut is that some of the more sophisticated builders will start to put financing on their own portfolios, certainly in a private market.”
The difficulty of securing housing permits in Los Angeles was a subject that inspired opinionated remarks from most panelists because, despite increasing demand and costs, new starts are impeded. A new master EIR for Los Angeles that developers can follow and quickly adhere to is needed, said Paul Habibi, lecturer of finance and real estate at Anderson and UCLA School of Law, and principal and co-founder of Habibi Properties LLC, which owns and manages multi-family apartments in the Los Angeles area, among other properties. “Plug-and-play zoning is what we need,” he said, “but I don’t see it happening in L.A.”
In all, panelists’ real estate optimism was tempered by the undeniably rising cost of either renting or purchasing — with senior Forecast economist David Shulman asking panelists whether there isn’t something “broken” in the California housing market. Incomes are slow to catch up to what our state’s market will bear. California Association of Realtors CEO Joel Singer observed that first-time home buyers in their 30s are shopping for the house they expect to retire in. On that subject, Kent Crandall, CFO of MBK Real Estate Companies, offered, “Housing stock is a food chain that begins with the first-time buyer…. We think it will be six more years before we see growth there.” Franco Terango, SVP of divisional sales for Bank of America’s southwest division, offered that the big difference in the market compared to pre-crisis conditions is, in fact, consumers’ expectations. With lending criteria as rigorous as they will ever be, he says, “Get to a lender early.”