Prices Rise for ‘Blue-Collar Buildings’
Prices for apartment buildings in East Los Angeles, South Central and other modest neighborhoods, including some in Orange County, 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 investors are paying for apartment buildings throughout the Southland.
Complexes in pricier neighborhoods are still appreciating in value, but the spurt in the values 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 several years, the study suggests.
The properties showing the biggest percentage gains in value are mostly small complexes owned by private owners rather than institutional investors or real estate investment trusts (REITs), according to the new study by Palo Alto-based Marcus & Millichap, an investment real estate brokerage.
The study showed the biggest leap in values occurred in South Central Los Angeles, where the average price per unit being paid for apartment buildings rose to more than $38,000 this year, compared with a little over $18,000 last year. Other increases included 67% in South Los Angeles County and 49% in East L.A.
The study did not include percentage gains in Orange County, but some working-class neighborhoods in Anaheim, Garden Grove and Santa Ana have reported that rents have risen by nearly as much as or more than some of the wealthier parts of South Orange County, said Marcus & Millichap’s John Kerin, a senior vice president who heads the company’s Southern California operations.
Although most rent appreciation in Orange County has occurred over the last year, rents continue to climb, the report said. Prices that rocketed in some areas were simply “finally catching up to the rest of the market,” Kerin said.
“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, but the same didn’t happen in some of the areas like South Central, which were slower to increase,” Kerin said.
“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 the more modest neighborhoods still lag slightly behind the peak prices of 1988 and 1989, when South Central apartments sold for an average of $40,000 per unit.
The study’s report of a slower recovery in blue-collar parts of town comes as little surprise to John Gordon of Pasadena-based Fertig & Gordon, which manages about 1,100 apartment units in the San Gabriel Valley, including about 350 units that Gordon and his investment partners own.
Gordon said he has marveled at previous reports suggesting that the entire apartment market has been booming since the recession ended, with rents rising 10% to 15% and still climbing.
Gordon said his company has been able to raise rents only about 2% to 4% this year in its lower-end, $400 and $500 apartments, 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 owners’ 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 Orange County market remains tight, the report said, with vacancies falling to 3%, the lowest in Southern California. But the rate of empty rentals is expected to edge upward this year as more new units are built. Still, in South Orange County, high-end housing averaging $1,200 or more per month remains in short supply, and the county’s rentals are expected to remain tight, since jobs are created at a faster rate than new units.
The Marcus & Millichap study also shows that virtually all the investment action in Los Angeles County for the first half of this year occurred among apartment buildings of five to 50 units.
The report said hardly any 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 in 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, the 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 larger, but it’s not in the market to sell any of its 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 L.A. 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 within 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 apartment developers can find sites, they have to 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 hardly any apartments in Los Angeles County, only about 5,000 a year, compared with tens of thousands per year in the 1970s and 1980s, according to Construction Industry Research Board statistics.
The lack of new construction and focus on luxury apartments is exacerbating the county’s shortage of affordable housing, experts say, with little hope that affordable apartments will be built unless the federal government steps in with massive subsidies.
The lack of sites for new construction means that larger companies must be imaginative if they want to expand their holdings in L.A. County, according to CEO 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 aggregate smaller buildings of 30 units and more that are near each other, Jennings said. Like REITs, 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 is also 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 happen to be under rent control, PCS has to “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 some buildings temporarily 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 pointed out that rents can vary sharply in nearly identical buildings on the same street because of the L.A. City 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.
