Suddenly, the Renter’s King in Southland

Early this summer, nearly 50,000 apartment dwellers in northern Orange County received a brochure in the mail that warned, “Don’t show this to your landlord!” It glowingly portrayed the attributes of a Buena Park apartment complex called McComber Creek and offered $250 cash to any newcomer who would sign a six-month lease.

One landlord who did learn of the mutiny-prompting literature being distributed to his tenants retaliated by sending another brochure to residents of McComber Creek, promising that if they would move to his nearby apartment project called Cinnamon Ridge and sign a six- or 12-month lease, they could get $30 to $50 lopped off their monthly rent.

However, the return salvo was improperly addressed, and only the managers of the McComber Creek complex, to their amusement, got a copy of the Cinnamon Ridge offer.

This exchange of fire between landlords in Buena Park symbolizes the increasingly competitive apartment market throughout Southern California.

An apartment building boom, spurred by low-interest financing from tax-free revenue bonds, has spilled thousands of new apartments on the market at the same time that lower mortgage rates have been luring tenants out of apartments and into houses and condominiums.

As a result, apartment owners are facing nagging vacancies and the stiffest competition that they have witnessed in many years.

After coasting through years of apartment shortages, when they could keep their projects full and raise rents annually without much effort, apartment owners within the last 18 months have started to fatten their advertising budgets, hone the public relations skills of their sales staffs, freshen up their properties and brandish a broad array of sales gimmicks.

Increasingly, newspaper advertisements for apartments are using such attention grabbers as offers of microwave ovens, color television sets and even trips to Hawaii and Mexico, combined with less colorful--but often more effective--inducements of rent discounts and cash bonuses.

And it is not uncommon for apartment managers to offer finder’s fees of $50 to $100 to their present tenants and to people who refer renters to their properties.

Gloria Owens, manager of Hampton Square, an apartment complex in Tustin, said: “I’ve had people come and ask me what I will offer them to move in.” Owens said that although the policy at her complex opposes giveaways, competitors are offering “$100 to $200, TVs, VCRs and microwaves.”

“It is definitely a renters’ market,” said Les Guttman, executive vice president of Modular Training Concepts, a Los Angeles marketing and training organization for property owners and managers. He predicted that the “softness” in the Southland apartment industry will remain “a year or two” before demand catches up with the new supply.

Bill Kraus, executive director of the Apartment Assn. of Orange County, said the average apartment vacancy rate in the county sank to about 1.8% in the late 1970s and remained that low until the last six months or so, when it rose to about 4%.

The competition for tenants is even fiercer elsewhere.

In Los Angeles County, the average vacancy rate has doubled during the past year, increasing to about 6% from between 2% and 3%, according to the estimate of Charles Isham, executive vice president of the Apartment Assn. of Greater Los Angeles.

Vacancies tend to be highest, he said, where apartment construction has been the most brisk--such as Long Beach, Hawthorne and the San Fernando Valley--and in West Los Angeles, where “yuppies are out buying homes.”

In some parts of Riverside and San Bernardino counties, the executive director of the local apartment owners association estimates, the apartment vacancy rate has risen to about 7% and has soared as high as 10% in “pockets,” such as the city of Riverside and the suburbs of San Bernardino.

In San Diego County, the apartment vacancy rate was 7.3% in April, up from 2.5% in the fall of 1984, according to a survey by the San Diego Apartment Assn.

The plight of apartment owners and managers in Southern California is overshadowed by the tribulations of their counterparts in less economically vigorous parts of the country, such as Houston, where tenants have been offered up to three months free rent for a year’s lease and apartment complexes with 30% vacancy rates are not uncommon.

However, Southern California’s much less dramatic increase in vacancies has been enough to halt an upward spiral of rents.

Research Network, a Laguna Hills real estate marketing and consumer research firm, reports that between 1978 and mid-1985, Orange County renters were hit by annual rent hikes that averaged 13% to 19%--well above the 10% average yearly rise in the cost of living. But a survey that the firm conducted last May showed that during the previous 12 months, average rents in the county remained flat.

John Markley, vice president of multifamily operations for William Lyon Co., said the company has already been forced to slightly reduce rents in Upland on its newest apartments, and he expects even tougher times ahead.

Renters Are the Winners

“Renters are the winners in the whole thing,” said Pamela Wooldridge, a principal in Research Network, who said she believes that a 4% to 5% vacancy rate is “healthy” for the industry.

For the first time in a long while, Wooldridge noted, many renters are exercising an option to buy their own houses.

Just 16 months ago, she said, the purchaser of a typical $100,000 condominium who made a 10% down payment would face monthly payments of $1,100 for principal and interest. Under today’s lower interest rates, she said, the monthly payments for the same condominium would be just $900. Meanwhile, she said, the average apartment rent remains $700 a month.

And renters who still cannot afford to become homeowners have a wider choice of apartments and are enjoying more attention from landlords.

When Keri Nielsen and her mother recently arrived from Nebraska, they were pleasantly surprised to discover that, for moving into an apartment in Tustin, they had a choice of a color TV or $200 off their first month’s rent. They chose the rent cut. In addition, a friend who had recommended the complex received a $100 referral fee from the landlord.

“I thought, ‘Wow!’ ” Nielsen said of the reception she and her mother had received.

Even as she spoke, the furniture of another tenant in the same apartment complex was being loaded onto a moving van. A young Marine said he was leaving the one-bedroom apartment that he rented for $560 a month to buy a condominium, for which he expects to make monthly payments of about $800 to $900.

Existing apartment complexes are competing not only with for-sale housing but with snazzy new apartment complexes sprouting throughout the region.

Many New Apartments

Kraus of the Apartment Assn. of Orange County, for example, said there are about 230,000 apartments in the county, of which about 5,000 were built in the last 12 months. Irvine Pacific, Irvine Co.’s home-building arm, alone has built 1,500 apartments in Irvine during the past year and plans to build 3,000 more in Irvine, Tustin, Newport Beach and Orange over the next two years.

The recent rush of apartment building was caused to a great extent by developers’ uncertainty about the future availability of low-interest bond financing that has been provided in recent years by cities and counties to encourage construction of more-affordable housing. So developers scurried last year to get a share of what may have been the last bond issue.

Once the current round of low-interest bond money is used up, apartment construction is expected to taper off. It would be hastened by pending federal tax legislation that would remove some major financial incentives for apartment ownership.

Officials of Kenneth Leventhal & Co. said apartment complexes that were built to generate tax losses would require rent increases of 20% to 30% to produce the same return on their investment under the new tax laws. But the owners will be unable to impose such rent hikes, Leventhal officials said, because of the current apartment glut.

Jack Oldham, a partner at Leventhal’s Newport Beach office, forecast that the current wave of new apartment construction will take two to three years to absorb.

Deluxe Accommodations

This latest generation of apartments offers a host of recreational amenities such as swimming pools, tennis courts and weight rooms. Often they also boast vaulted ceilings, walk-in closets, fireplaces, microwave ovens, washer and drier hookups, separate water heaters and enclosed garages--features that make them akin to condominiums and light-years apart from the spartan-like apartments built in earlier decades.

Rents on the new south Orange County apartments reflect the high cost of land and construction. John Markley, vice president of William Lyon Co.’s multifamily operation, said the cost of building a south county apartment ranges from $70,000 to $100,000, which translates into typical rents of about $700 a month for a one-bedroom unit and $800 to $1,000 for two bedrooms.

Increasing numbers of families and blue-collar workers are deciding to commute to the Inland Empire of Riverside and San Bernardino counties for more-reasonably priced rentals.

Don Johnson, president of Anza Management Co. in Irvine, said many less-affluent renters in central and northern Orange County are moving to Riverside County. Johnson said Anza Management recently found that 20% of the prospective tenants leaving deposits on apartments at a new complex in Corona were from Orange County. The two-bedroom, two-bath apartments in the Corona complex were renting for $660 to $680.

California renters are notoriously more transient than their peers in other parts of the country. So the state’s landlords not only must fight to win new tenants but to keep the ones they already have. “We have more month-to-month renters than anywhere in the nation,” said Dorothy Gourley of Dorothy Gourley & Associates, a Newport Beach marketing consulting firm.

Offer Rent Discounts

To try to inject some stability into what is becoming an even more volatile apartment market, some apartment owners are offering rent discounts to prospective tenants who agree to sign six- and 12-month leases.

Recently, for instance, R&B; Enterprises, the West Los Angeles-based owner and manager of the Oakwood apartments, offered 10% and 15% rental discounts on six- and 12-month leases at complexes near Burbank and in Anaheim, Garden Grove and Newport Beach.

Donna Hyden, property manager for River Oaks, a Newport Beach company that owns and manages apartments, said the company’s advertised specials on apartments are altered “from week to week” to anticipate vacancies. She said discounts are made on apartments as soon as tenants post notice that they are moving.

When the south Orange County market recently began softening, the River Oaks apartment complex in El Toro started offering--to anyone who would take a six-month lease on its one-bedroom apartments--a $300 discount on the first month’s rent and a trip to Mexico on Mexicana Airlines, with accommodations in four-star hotels.

Three weeks after the ad ran, Ginny McDonald, assistant manager of the El Toro complex, said seven or eight vacant apartments had been filled.

McDonald said River Oaks has tried to replace raw competition with cooperation among managers of apartment complexes in south Orange County.

She has compiled information on 23 apartment projects in the area that she makes available to apartment hunters who come through her office. In turn, she said, she hopes that other apartment complexes will refer prospective tenants to River Oaks. If they do, she said, they will be rewarded with a $100 finder’s fee.

Hiring Ad Agencies

As part of their new marketing push, apartment owners are hiring some of the same advertising and public relations agencies that usually package promotions for tract houses.

“Right now, I have five apartment developers (as clients) and am talking to five more. A year ago I had none,” said Barbara Stewart, chief executive of Stewart Advertising & Public Relations in Newport Beach. She said some apartment developers, which historically have spent little or nothing on marketing, are now spending $100,000 to $200,000, or up to 4% of their gross income for the year, on marketing campaigns.

To fill new apartment complexes, owners are starting to staff leasing offices months before the first apartments are built. They are also printing glossy brochures, throwing gala opening parties, taking out eye-catching display ads in the classified sections of newspapers, hiring interior decorators to furnish model apartments and putting out colorful flags and huge “for rent” signs.

“They are going through the same paces and steps as for-sale housing,” said Ken Becker, vice president of Hubbert Advertising & Public Relations.

Apartment owners are also sharpening up their sales forces. “We are placing tremendous emphasis on our sales personnel. We are forced to become sellers as opposed to order takers,” said Ted Konopisos, president of Arnel Management Co. of Santa Ana, which manages about 4,500 apartments in Orange County and 600 in Los Angeles County.

About 75 of his sales people have been put through a special training program during the last 18 months, he said.

Sparks Some Complaints

The emphasis on luring new tenants can backfire by alienating existing tenants if landlords are not careful.

Joanne Grazioso, a two-year tenant at Alicia Plaza in Laguna Hills, said she was “aggravated” about her $50-a-month rent increase, especially when a new tenant she was chatting with at the pool told her that the landlord was offering to slash up to $100 a month from the rent of newcomers.

“They are trying to fill the vacancies by slapping the people who have been here longer in the face,” Grazioso complained. After she objected to the apartment manager, she was told that if she agreed to stay she also might be able to obtain a discount by signing a long-term lease.

Susan Sirota, regional property manager for Arnel, which owns Alicia Plaza, said: “It is a kind of fine line we walk” between attracting new tenants and keeping the old ones contented, especially since the company has a policy of raising rents every year to be “at the top of the market.”

Owners of older apartment complexes that want to retain their tenants need to paint, lay new carpeting and otherwise give their properties a face lift, according to Gourley of Gourley & Associates.

“You will find softness in older buildings where the management is not tops,” added Gourley, who also advocates that apartment managers inspire a feeling of community in their projects by issuing monthly newsletters.

Changed Their Ways

Jim Beard and Robert Hoshaw, Newport Beach apartment developers and owners who are among Gourley’s clients, said they have changed their way of doing business. Hoshaw said that, until recently, “we had been sitting back and spending all the cash flow” from their apartments.

But that ended, the partners said, when they noticed last December that the vacancy rate in their 10-year-old McComber Creek complex in Buena Park had soared to 12.9%, representing a $17,692 loss of rental income for the month.

Beard said the partners decided to take advantage of the same low interest rates that some of their renters were using to become homeowners in order to borrow money to spruce up the McComber complex.

The partners spent $383,000 to repaint the complex, repair rotting bridges that span a decorative creek, purchase new gym equipment for the recreation area, buy new washers and driers for the laundry rooms, replaster the swimming pool, buy new patio furniture and replace worn carpeting.

And on the marketing front, they spent $32,000 on a six-month advertising campaign, offering a $250 cash gift to prospective tenants who would sign a six-month lease agreement. “We had our fingers crossed that it would work,” Beard said. Apparently it did. At last count, Beard said, only one apartment was vacant in the 348-unit complex.