Investor Demand Drives Up Values of L.A. Apartments
Apparently unfazed by either war or recession, the Los Angeles apartment market continues to rise in value, with high-end Westside apartments performing best of all, based on data from Los Angeles-area brokerages.
Citywide, the sale price of apartment buildings with five or more units rose to an average of $64,346 per unit in the third quarter, or $83.35 per square foot, compared with $60,729 per unit, or $78.96 per square foot, in the same period last year, according to Marcus & Millichap, an Encino-based real estate brokerage.
Sales figures also indicate that high-end apartment buildings in Beverly Hills, Brentwood and Westwood are selling for appreciably more than year-ago levels, according to Charles Dunn Co. The company defines high-end as apartment complexes valued at $5million or more and located in prime areas.
Although only a few sales have occurred since the September terrorist attacks, prices on high-end Westside complexes have risen to an average of $173,546 per unit, or $196.40 per square foot, in the fourth quarter so far, compared with $131,382 per unit, or $133.99 per square foot, in the fourth quarter last year, Charles Dunn reported.
The strong showing suggests that demand remains strong during a period of slow construction. “We have a lot of buyers with a lot of money out there chasing deals,” said Tony Azzi, senior investment associate with Marcus & Millichap.
At first glance, the appreciation in apartment values is surprising because neither rent nor vacancy rates are much improved from last year. The citywide vacancy rate was 2.4% in the third quarter, virtually unchanged from the same period last year, while rent increased slightly to an average of $1,331 monthly in the third quarter from $1,213 in the previous year, according to Marcus & Millichap.
Vacancy rates were actually weaker for high-end Westside complexes, which reported vacancies of 4.6% in the third quarter, up from 1% a year earlier, the brokerage reported. Rent in the same complexes rose to an average of $1,702 from $1,570 a year ago.
Although rising vacancies often result in lower apartment prices, the clamor of investors is bolstering Westside apartment values, said Hamid Soroudi, senior managing director of Westside investment for Charles Dunn.
“For each of these properties, there are seven to 10 offers,” he said.
Many buyers, Soroudi added, want to buy in the Westside only. “The Westside is perceived as a safe haven for capital and has always performed well,” he said. In the mid-1990s, he added, “when foreclosures were the norm everywhere, we had only a handful.”
The wave of refinancings that followed the downward march of interest rates in recent months is one reason the apartment market is flooded with money, Soroudi said. Many apartment investors have recently refinanced their properties and pulled some extra cash from those deals.
Some hope to use their refinancing windfalls to invest in Westside apartments, perhaps in the hope that the current malaise in real estate will bring down prices.
Apartment owners, however, have little incentive to sell. By refinancing their own properties, they lower their mortgage payments and increase their rental income. With equity markets looking wan, apartment owners “feel they have no alternative investment that is safe and conservative,” said Azzi of Marcus & Millichap.
Investors looking for bargains are not likely to find them, Soroudi said. “These types of properties are scarce, and their owners are not interested in selling,” he said.
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Apartment Values Float Upward
Despite sagging values in other types of real estate, Los Angeles-area apartment complexes show steadily rising prices because of high investor demand and a shrinking inventory of properties for sale.
Westside (Beverly Hills/Brentwood/Westwood)
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3rd qtr. 3rd qtr. 4th qtr. 2000 2001 to date Total sales 28 24 6 Avg. price per sq. ft. $142 $160 $196 Avg. price per unit $148,847 $148,864 $173,546
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City of Los Angeles
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3rd qtr. 3rd qtr. 4th qtr. 2000 2001 to date Total sales 236 231 25 Avg. price per sq. ft. $79 $83 $114 Avg. price per unit $60,729 $64,346 $89,970
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Sources: Charles Dunn Co., Marcus & Millichap, CoStar COMPS
