Apartments Find Favor as Investment : S.D. County Prices Attract Buyers From Over the Southland

For two years now, San Diego commercial real estate brokers have been urging investors to buy apartments, saying that the residential units would soon be as good as gold. But buyers, still leery of hard times investors suffered during the mid-1980s when a glut of apartments were built, seemed to shy away from such advice.

Not any more.

Investors, particularly from Los Angeles and Orange counties, are increasingly turning to San Diego County for properties to buy, especially in North County. With new residents flooding into the region, many of them unable to buy San Diego’s pricy homes, newcomers tend to become tenants, which raises demand for apartments.

“It’s an ideal situation,” said Bruce Blumenthal, director of acquisition for Schickler & Meringoff Properties, a Los Angeles-based real estate investment firm. Blumenthal’s firm spent $22 million in March to purchase Emerald Point apartments, a 456-unit complex in Vista. He added, “We’re looking to acquire more in San Diego.”

So is Paul A. Laubach, president of Providence Capital Group, an Orange-based real estate investment firm.

Looking in Oceanside

“I’m still looking in Oceanside . . . and I would love to pick up a building in the beach communities, Del Mar or Encinitas,” Laubach said. Providence Capital Group has already purchased 210 units in San Marcos, Escondido and Fallbrook for $10.5 million. In addition, Laubach said, the firm has 374 units worth $20 million in escrow.

Laubach and Blumenthal are just two of the many Los Angeles and Orange county investors--discouraged by the limited number and more expensive buildings in their region--who are turning south to cash in on investment opportunities, according to Kevin Mulhern and Edward Aloe, apartment specialists at Coldwell Banker Commercial Real Estate.

Nearly half of the 44 transactions involving apartment projects with 15 or more units (67% of 3,026 units sold) in North County so far this year have involved buyers from Los Angeles and Orange counties, according to Aloe. Industry experts say even more investors, including out-of-state and foreign buyers, will be eyeing the San Diego market as well in coming years.

High demand has helped push up the price per unit that investors are paying for apartments here to an average $70,000, up from $45,000 to $50,000 per unit four years ago, said George Carlson, an apartment broker with John Burnham & Co. in San Diego.

“San Diego was ranked in the top 10 in economic growth between 1983 and 1988 and is also projected to be in the top 10 through 1993,” said Aloe, citing a Kenneth Leventhal & Co. study released at the 1989 Annual Apartment Conference held this month in Anaheim.

“San Diego is also in the top 10 for population growth,” Aloe said. “Those are two factors that will drive any real estate market.”

Frenzied Sales Activity

In addition, today’s high construction costs and slow-growth ordinances should prevent new units from coming on line, making existing apartments all the more valuable, industry experts say. That has spurred frenzied sales activity, said Carlson of John Burnham & Co.

According to a recent apartment sales report released by Burnham, 1,029 projects (or 16,155 units) have been sold in the county through August, up 12% over the 913 projects (or 11,959 units) sold during the same period in 1988.

“At the current pace, 1989 sales activity is running slightly ahead of 1985’s record pace,” Carlson said. “In fact, this could be San Diego’s strongest sales year this decade.”

But even enthusiastic investors, such as Blumenthal, express some reservations about the San Diego apartment market’s potential.

“You can’t miss on anything that you buy--that’s what a lot of the brokers want us to believe, but that’s not necessarily true,” Blumenthal said. “San Diego is a wonderful marketplace, but it’s not a gold mine.

‘A Lot of Variables’

“If all the indicators come through, yes, we’ll probably have an attractive market with annual rent increases,” Blumenthal said. “But there are a lot of variables and, if any one of them turns against us, we could have a lot of problems. For example, if we go into a recession, you can forget about it.”

Although many brokers tout what they expect to be double-digit rent increases in coming years, Blumenthal reminds investors that rents have remained flat for three years.

“I think there’s still a glut of apartments, and, although many cities have building moratoriums in place, I’ve seen plenty of developers get around such limits.”

Without question, however, apartment construction has slowed dramatically--a natural occurrence following overbuilding between 1984 and 1986, and in part, because of slow-growth initiatives and higher construction costs.

Rental Prices Flat

“Back then rent prices were increasing by 10-12% each year,” said Mulhern, referring to the early 1980s. “Developers were saying, ‘Wow!’ and came running over here to build apartments. Such a building spree resulted in an annual average gain of 25,000 units.

“The developers built themselves right out of a rent increase market,” said Mulhern, adding that rental prices stayed flat from 1986 to 1988. Consequently, construction has declined; according to Coldwell Banker analysts, only 7,000 to 8,000 apartment units will be built this year, down from about 15,000 units in 1987.

Industry analysts expect even fewer apartment units in the years ahead.

“We’ve had so much growth lately that there is a backlash now, a lot of slow-growth, anti-growth sentiment,” Mulhern said. “People are asking, ‘What about schools? What about parks?’

“And, even if a city doesn’t have a slow-growth ordinance, practically every city has slapped on expensive building fees,” Mulhern added. “That alone is enough to deter developers.” Building fees and rising land costs are the principal factors that have escalated the price of building apartments.

Surplus Absorbed

Such curbs on construction and a net migration last year of more than 70,000 new residents into the county each year are combining to finally allow the absorption of surplus apartments.

“Most people moving into San Diego County are not ready to become first-time home buyers,” Mulhern said. “With the median county home priced at $179,000, the majority of these people are going to be renters.”

Already such factors have helped lower vacancy rates to about 6% countywide from 10% to 12% two years ago. Once vacancy rates drop to 5%--a pivotal figure that industry analysts say signifies a switch from a renter’s market to a landlord’s market--San Diego should see true rent increases for the first time in three years.

“Some might say that they have increased rents in recent years, but that’s deceiving,” Mulhern said. “In many of those cases, owners may have been charging higher prices, but at the same time they were offering a lot of concessions.

Aloe says the era of concessions is coming to an end and expects true rent increases starting in 1990. Industry experts say 5% to 8% annual increases in a year or two are probable. Opportunistic investors are hoping for more.

“We’ve looked all around, Los Angeles, Orange, Ventura . . . they’re all overpriced,” Laubach said.