For Some, Renting Will Do Just Fine
The notion that owning a home is every American’s dream isn’t entirely true, say builders and owners of some of Southern California’s most expensive apartments. They’re counting on changing demographics and continued prosperity to provide a steady flow of not only well-heeled tenants but middle-income renters as well.
The growing number of people who are renters by choice, along with the general housing shortage in Los Angeles, is spurring construction of new apartments where rents often top $3,000 a month. And some markets, particularly on the Westside, are strong enough to support upgrades of existing buildings into luxury complexes with substantially higher rents.
Renters by choice--as opposed to by necessity--range from young, single professionals with high incomes to retired couples who have owned homes but have had enough of yardwork and other burdens of homeownership.
Though renters by choice include many middle-income tenants paying moderate rents, the lucrative luxury market is attracting the most attention from developers.
“There is clearly a growing demand for luxury apartments,” said Paul Jennings, chief executive of Los Angeles-based PCS Development, which has spent the last four years converting existing complexes into upscale apartments.
The centerpiece of PCS’ holdings is the Premiere, a 393-unit complex in Sherman Oaks that the company opened in August 1998 after spending $25 million repairing damage from the 1994 Northridge earthquake, adding to and remodeling the complex to include a 30-seat screening room, a new fitness center, upgraded interiors, Internet connections and access to computers, among other amenities.
Rents at the Premiere range from about $800 for a studio unit to $2,500 for a two-bedroom apartment, according to Jennings.
There is luxury and then there is luxury, however. The same $2,500 that would rent a 972-square-foot, two-bedroom at the Premiere wouldn’t be quite enough to pay for some of the one-bedroom apartments being built at Sea Castle, an eight-story, 178-unit, beachfront complex under construction in Santa Monica.
Most of the rents at Sea Castle, which will have only studio and one-bedroom units, will range from $1,500 to $3,300, said Mark Kerslake, a Newport Beach-based principal of Province Group, which is developing the complex.
Santa Monica regulations require that 45 units of the complex be affordable to renters of low to moderate incomes, Kerslake said, so those 45 units will rent for $600 to $1,100. The studio apartments will have about 550 square feet and the one-bedrooms, about 650 square feet.
That will give Sea Castle some of the highest rents per square foot in the region, but Kerslake is confident that Province Group can fill the new building, which is slated to be completed in March.
“The rents seem high, but this is a unique building, and when you compare it to other alternatives for living at the beach in Santa Monica, such as spending a couple of million dollars for a house, it’s economical,” Kerslake said.
Scarcity of oceanfront housing is likely to remain the norm in Santa Monica. The city is permitting the Sea Castle to be built only to replace an apartment complex that was destroyed by the Northridge earthquake. Also under renovation on Ocean Avenue is high-rise Champagne Towers, another earthquake-damaged apartment complex.
Kerslake said many of the residents of Sea Castle will be the definition of renters by choice: people who could afford to buy a home but prefer to rent, or those who are determined to live in a particular location because they like the lifestyle it offers.
“Often it’s just people choosing to live close to where they work, as opposed to choosing to live where they can afford to buy a house,” Jennings said.
Depending on the metropolitan area of the country and the specific apartment complex, renters by choice could represent up to 60% of the tenants in a building, said Dennis Cavallari, an Irvine-based senior vice president with Legacy Partners, which is developing luxury complexes in Santa Monica and Westwood and plans two more luxury buildings in the San Fernando Valley next year.
Though “there is still a huge percentage of the population that is set on buying a home,” Cavallari said, renters by choice prefer to live in an apartment and spend their discretionary income on travel or entertainment instead of scrimping and saving for a down payment on a house.
Rents will range from about $1,600 to $3,500 at Plaza at the Arboretum, a 350-unit Legacy project underway on Colorado Avenue near Cloverfield Boulevard in Santa Monica, and from about $1,700 to $4,000 for the one-, two- and three-bedroom units at the Legacy at Westwood, a 187-unit building under construction on Wilshire Boulevard near Glendon Avenue, Cavallari said. The Santa Monica and Westwood projects are both scheduled for completion next summer.
The Westwood apartments will include such lavish features as granite counter tops, hardwood floors, marble entryways, Berber carpeting and upgraded plumbing and electrical fixtures.
Cavallari believes that plenty of tenants will be interested. He noted Legacy earlier this year completed a 170-unit complex in Marina del Rey called Tierra del Rey, where rents range from $1,400 to $3,300. The complex was 100% occupied within about six months after it was completed, Cavallari said.
“Everything we’re working on right now falls into the luxury category,” Cavallari said. He said Legacy plans to break ground in the spring on a 200-unit luxury project in Studio City and a 579-unit luxury complex in Warner Center. Later in the year, it plans another Marina del Rey complex and a project in Pasadena.
The focus on the luxury market comes at a time when Los Angeles faces an acute shortage of housing, especially a lack of apartments that would be affordable for people with low and moderate incomes, experts say. But developers say sky-high land and construction costs dictate the building of luxury units if they’re to make a profit.
Those who rent by choice “are at the other end of the income distribution from apartment renters who receive government assistance” and other “renters by necessity,” according to a report from the National Multi Housing Council, which estimates that 14% of all apartment dwellers are renters by choice.
Renter by choice Marcy Grado said friends have encouraged her to buy a home, but Grado, a single parent who lives at a PCS-owned apartment building in Sherman Oaks, said she prefers apartment living for the time being.
“I might be interested in owning a home when my kids get a little older, but I like the convenience here and I love this neighborhood,” said Grado, a makeup artist in the music video industry who pays $965 a month for a two-bedroom apartment.
“A house would mean a lot more responsibilities,” Grado said. “If something goes wrong here, all I do is make one phone call and it’s taken care of, usually the same day. If I had a house, it would probably take me days to get it done.”
Grado also said she’s reluctant to move because she’s become friends with many tenants in the building, feels safe and comfortable in her neighborhood and finds the location convenient for work.
Jennings of PCS said luxury apartments fill the gap created by the near-halt in construction of condominiums, which many luxury renters might otherwise buy. Industry experts say developers have stopped building condos because of widespread condo construction lawsuits. The other primary alternative for luxury renters is buying a home.
Luxury apartment complex prices have soared since the recession ended, according to Hamid Soroudi, a broker with Charles Dunn Co. who specializes in luxury apartment sales.
Soroudi said prices have spiked the highest on the Westside in Santa Monica since the relaxation of rent-control regulations. The city switched Jan. 1 to vacancy decontrol, which permits landlords to raise rents to market levels when apartments are vacated.
Because sales prices of apartment buildings are based on rents, Soroudi said, higher rents translate to higher sales prices. Prices per square foot paid for Santa Monica apartment complexes rose more than 50% to $160.46 per square foot this year compared with last year.
During the same time, prices per square foot rose 26% to $187.28 in Brentwood, 23.1% to $149.97 in West Los Angeles and 12.8% to $157.71 in Westwood, Soroudi said.
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Renting vs. Buying
Rocketing rents in Los Angeles County remain well below monthly mortgage payments for homes in comparable neighborhoods. Although monthly rent payments in many L.A. communities would cover a mortgage in outlying parts of the county or in the Inland Empire, many renters consider living in their neighborhood of preference to be more important than homeownership.
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* In apartment buildings with five or more units
Source: Marcus & Millichap
