It's a cold winter for apartment investors in Los Angeles County: Rents are down, prices have fallen and vacancies are way up.
Deal velocity -- broker slang for sales volume -- is a thin stream compared with the overflowing activity of 2005 and '06, the most recent boom years.
But to smaller investors like Johnny Caal, with cash in hand and a taste for risk, the weather is delightful.
This is the best market I've seen since 1994," during the previous recession, said the Van Nuys-based investor, who owns six small rental complexes in L.A. County. He is in escrow on a six-unit building in Van Nuys.
Falling apartment values bring out the so-called bottom feeders, or small investors in search of inexpensive property.
In 2009, the bottom feeders and other small investors ruled the investment market in multifamily housing.
Apartment complexes with five to 49 units captured a lopsided share of new investments in multifamily properties in Los Angeles County last year: There were 552 sales, according to figures compiled by Marcus & Millichap, a national real estate brokerage based in Palo Alto. By comparison, only 15 complexes with 50 to 100 units sold, and 16 with 100 units or more sold.
Many people think of small apartment complexes as those with fewer than 15 units. California law requires larger complexes to have an on-site manager, an added cost that some investors shun.
Overall, apartment-house prices have been falling for the last few years: They slipped to an estimated median of $128,500 a unit last year, down 4% from 2008, Marcus & Millichap data show. The median price is the point at which half sold for more and half for less.
The largest complexes are favored by institutional investors such as pension funds and insurance companies. Those big investors are sitting out the market for good reason.
Armed with professional advisors and expensive software, institutional investors want deals that conform to specific investment criteria. And owners of institutional-grade property don't want to sell in this dismal market. In other words, it's an investment stalemate.
But in the mom-and-pop market for smaller buildings, many people are eager to gain a foothold in the potentially profitable investment field. A small apartment building is often the first real estate purchase after an investor's residence.
Many small investors aren't as methodical as institutional buyers, and some are willing to accept a riskier or less profitable project so they can get into a coveted type of investment.
The current market seems almost the opposite of the boom years of 2005 and 2006.
Prices rose sharply in those years, attracting get-rich-quick investors who believed they could hold properties for short periods and sell them profitably -- regardless of the income generated by rents.
Currently, "there are more listings than buyers who are both motivated and financially qualified," says Roderick "Rick" Raymundo, a broker with the Los Angeles office of Marcus & Millichap.
Not all small rental complexes are underpriced, Raymundo says. For a small number of fully occupied, well-maintained properties in desirable locations, sellers may receive a dozen offers or more, with bids close to the asking price.
"In a market like this, there is a flight to quality, to investments that are less risky," he says.
Apartment vacancies in Los Angeles County rose to 6% in mid-2009, according to Marcus & Millichap figures. In a strong apartment market, vacancies can fall below 2%.
In a weak market, landlords cut prices to compete for tenants.
"People are lowering rents to fill up their buildings, and the decline in income probably hurts the moms and pops," says Bruce Bernard, an L.A.-based investor who owns a portfolio of buildings with 40 to 100 units each.
Discouraged by market conditions, apartment investors who bought property in the "up" market may choose not to sell, while those who are selling may stick stubbornly to unrealistically high asking prices, says Tracey Seslen, assistant professor of clinical finance at the USC Marshall School of Business.
"Some sellers are doing the ostrich thing," she says, "not really wanting to cut their losses and move on to the next phase into their investment strategy."
Rather than trying to bid down the price of expensive buildings, Caal says he is particularly interested in buying distressed properties, "because that's the best bang for your dollar."
In April, Caal bought a six-unit building that was nearly empty, with boarded-up windows. The seller was having difficulty getting rid of the property because no bank was willing to finance a sale for a building in such poor condition.
Caal says he persuaded the previous owner to carry the mortgage -- that is, to remain the official owner while Caal assumed responsibility for all expenses.
The investor repaired the property and found new tenants.
Nine months later, Caal was able to find a bank willing to make a loan on the refurbished building and complete the sale.
Caal remains interested in buying apartment complexes, and he doesn't plan to offer any of his own properties to other investors.
"I'm not selling," he says firmly. "It's a pretty crazy time to do that right now."