Prices Rise for ‘Blue-Collar Buildings’
Prices for apartment complexes in East Los Angeles, South-Central and other modest neighborhoods are climbing fast--much faster than prices for residential buildings in the region’s more well-to-do districts, according to a recent report on what real estate investors are paying for properties throughout Los Angeles County.
Apartments in pricier neighborhoods are still appreciating in value, but the spurt this year in the value of what many call “blue-collar buildings” suggests that some lower-income properties are finally joining the real estate recovery that has driven prices ever upward in upscale neighborhoods for the last several years, the study suggests.
The properties showing the biggest percentage gain in value are mostly small complexes owned by private owners rather than institutional investors or real estate investment trusts, according to the study by Palo Alto-based Marcus & Millichap, an investment real estate brokerage.
The study showed that the biggest leap in values occurred in South-Central Los Angeles, where the average price per unit paid for apartment buildings rose to more than $38,000 this year, compared with a little more than $18,000 last year. Other increases included 67% in South Los Angeles County and 49% in East L.A.
But those huge leaps are probably one-time events, according to Marcus & Millichap’s John Kerin, a senior vice president who heads the company’s Southern California operations.
Kerin said prices that rocketed in some areas were simply “finally catching up to the rest of the market.”
“There was a point in about 1996 or 1997 when values jumped up pretty quickly in the higher-priced markets because we got our jobs back and we had a tighter rental market,” Kerin said, “but the same didn’t happen in some areas like South-Central, which were slower to increase.
“You’re likely to see more gradual increases from now on in places where we had those quantum leaps this year,” Kerin added. He noted that today’s prices in more modest neighborhoods still fall slightly below the peak prices of 1988 and 1989, when South-Central apartments sold for about $40,000 per unit.
The study’s report on the tardy recovery in blue-collar neighborhoods comes as little surprise to John Gordon of Pasadena-based Fertig & Gordon, which manages about 1,100 apartment units in the San Gabriel Valley.
Gordon said his company is able to raise rents only 2% to 4% this year in its lower-end apartments, which rent for $400 to $500 a month, and about 5% to 7% in its $800 and $900 units.
“The market isn’t uniform. The luxury apartments are doing much, much better from an owner’s point of view. I wish I had sold all of my blue-collar apartments years ago and had bought in the more affluent areas,” Gordon said.
The Marcus & Millichap study also showed that virtually all investment action in Los Angeles County in the first half of the year occurred with apartment buildings of five to 50 units.
The report said few large apartment buildings are selling in Los Angeles County because of a slowdown in activity by real estate investment trusts, which were a major buyer of larger buildings from 1996 through 1998. Large complexes are defined as those with 100 units or more.
“The REITs purchased a lot of the larger properties a couple of years ago, but they haven’t put them back on the market, so there aren’t a lot of big buildings to buy,” Kerin said.
As a result, Kerin explained, REITs have turned to building rather than buying apartments in Southern California, leaving the buying and selling of apartment complexes to private individuals and investment groups.
“We are, by nature, set up for larger, longer-term investments,” said Scott Davis, vice president of development and acquisitions for Alexandria, Va.-based AvalonBay Communities Inc., an apartment REIT.
AvalonBay has three sites in Los Angeles County under contract to build apartment complexes of 100 units or more, but it’s not in the market to sell any existing local holdings because, “We don’t have a motivation to sell. It’s not in our mind-set to just get in and get out of a property,” Davis said.
Davis noted that Los Angeles County, compared with other parts of the country, offers relatively few opportunities for REITs to buy or develop large apartment complexes. Only 3% of the apartment buildings in L.A. County and 4% of those in Orange County contain 100 or more units, compared with 18% in the Inland Empire, according to Marcus & Millichap.
“And there aren’t a lot of sites in Los Angeles County” to build large complexes, Davis said.
When developers can find sites, they must build luxury apartments if they want to make a profit, Davis said, because land and construction costs dictate higher rents.
The upshot of high costs and lack of land is that developers are building only about 5,000 apartments a year in Los Angeles County, compared with tens of thousands per year in the 1970s and 1980s, according to the Construction Industry Research Board.
The lack of new construction and focus on luxury apartments is exacerbating the county’s shortage of affordable housing, experts say. They hold out little hope that affordable apartments will be built unless the federal government steps in with subsidies.
The shortage of sites for new construction means that companies must be imaginative if they want to expand their holdings in L.A. County, according to Chief Executive Paul Jennings of Los Angeles-based PCS Development, which owns approximately $150 million worth of apartment complexes, mainly in the San Fernando Valley.
PCS’ strategy has been to purchase smaller buildings of 30 units or more that are near one another, Jennings said. Like a REIT, PCS is in the market to buy larger buildings but can’t find any on the market, he said, so combining smaller buildings that are near each other is the next best approach.
PCS also is pursuing what Jennings calls “a bit of a bold strategy” of investing $10,000 to $20,000 per unit in apartment complexes, in hopes of being able to raise rents.
The strategy is bold because, if the buildings are under rent control, PCS must be patient and raise rents gradually according to rent control regulations, Jennings said. In some cases, he said, the company is losing money on some units or buildings until it can bring rents up to a profitable level.
If the buildings aren’t under rent control, however, PCS can raise rents quickly because demand is high and tenants are willing to pay higher rents for higher-quality apartments, Jennings said.
Jennings, Kerin and Gordon all said that rents can vary sharply in nearly identical buildings on the same street because of Los Angeles’ rent control law. The law regulates rents on buildings for which occupancy permits were issued before Oct. 1, 1978, the date the rent control ordinance went into effect.
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Gaining Ground
The top 10 appreciating apartment submarkets in Los Angeles County:
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Avg. price Avg. price per unit per unit Pctg. Submarket name midyear ’98 midyear ’99 increase 1 South-Central $18,203 $38,171 110% 2 South L.A. County 42,764 71,334 67 3 East Los Angeles 22,367 33,438 49 4 W. San Gabriel Valley 42,751 63,342 48 5 Mid-Cities 32,457 44,080 36 6 Long Beach 33,985 43,175 27 7 South Bay-North 31,765 39,347 24 8 Glendale/Burbank/Pasadena 62,762 76,938 23 9 N.E. San Fernando Valley 32,761 37,828 17 10 Hollywood 42,950 49,859 16
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Note: Sales are for buildings with five units and up and priced at $500,000 and up.Source: Marcus & Millichap
