Apartments are the development du jour among builders
The last surviving original developer of Marina del Rey got a little emotional before turning a shovelful of dirt to mark the beginning of a new apartment complex that will replace the one he built in the early 1960s.
Under an awning decked in red, white and blue, Jerry Epstein recalled last month how financiers were skeptical of the man-made marina in its early days, and only a “very substantial” loan from actor Kirk Douglas gave Epstein enough cash to build Del Rey Shores apartments on Via Marina.
Getting financing is still a challenge for apartment developers today — Douglas came through again for Epstein’s latest project — but apartments are now the favored class of commercial real estate among buyers and builders. If you see a building under construction, it’s most likely an apartment complex.
The tepid economy and cratered housing market have been good for apartment landlords, analysts say, and the slow pace of recovery is expected to help keep apartments the most desirable abode for many in the years ahead.
“The next decade is likely to be the most profitable for our industry in the last 20 years,” said Charles Brindell Jr., president of Mill Creek Residential Trust, a real estate developer that plans to build 350 units in Irvine.
Homeownership goes in and out of favor, UCLA professor Stuart Gabriel said, and now it’s in decline.
“The pendulum swings back and forth a bit,” Gabriel said. “Homeownership is not dead, it’s just in a period of adjustment.”
Least popular are homes in remote “exurbs” far from cities, he said. With gasoline prices at sustained highs, many people want to be closer to their jobs in urban centers where the most affordable housing is often apartments.
Demographics and generational trends are also working in favor of apartments. Many renters in their 20s and 30s are delaying marriage and childbearing, he said, and cherish the mobility to move where their careers take them. Other young people who have moved back home with their parents or doubled up with friends can be expected to rent their own apartments when they get jobs or feel more secure about their employment.
The recent glut of home foreclosures, however, has not produced a run on local apartments, a researcher said.
“Apartment operators very consistently tell us that they only get a few new residents out of foreclosed homes,” said Greg Willett of MPF Research. “Those folks tend to end up in single-family rentals, which are widely available across Southern California.”
After lagging behind most of the country in 2010, regional rents started moving up in the first half of this year. Average rent in Los Angeles and Orange counties is slightly more than $1,500 a month, Willett said. He predicts that Southern California rents will rise about 4% each year in 2011 and 2012.
The power to raise rents is returning to local landlords because the number of new jobs has increased slightly, Willett said, elevating demand.
That predicted lift in rents has developers breaking ground. Permits to build nearly 1,000 apartments were issued in May in the city of Los Angeles, the most since November 2008, the Construction Industry Research Board said.
One of the biggest projects approved that month was Chinatown Gateway, a $93-million complex under construction at the busy intersection of Broadway and Cesar Chavez Avenue. Renters are expected to be “young professionals and urban digerati,” said Mark Tennison, who heads development for apartment landlord Equity Residential.
Downtown Los Angeles saw a boom in residential development during the last decade that left the neighborhood oversupplied with condominiums and apartments, but the excess units are being absorbed fast enough to justify new construction, developers said.
Nearly all Equity Residential units are leased in its downtown buildings, including Pegasus in the financial district and Mozaic at Union Station, Tennison said. Turnover of units has slowed in the company’s 8,300 units in Los Angeles County.
“We’re not losing people to purchasing homes,” he said. “I think they are going to stay longer than they did in the past. They appreciate the flexibility of the downtown lifestyle.”
Developer Rick Caruso also sees a growing appreciation for apartment living and is building a $60-million residential and retail complex near his Grove shopping center in Los Angeles.
“More and more people are choosing to live an apartment lifestyle rather than owning homes. There’s been a bit of a cultural shift,” he said.
Caruso’s 8500 Burton Way project will have 88 units over a Trader Joe’s store when it opens in about a year. Though he’s best known for his shopping centers, including Americana at Brand in Glendale, Caruso is keen on residential rentals.
“We plan to build a lot more apartments,” he said.
Real estate developers are renowned for their optimism, which often leads to construction of more commercial buildings such as apartments and offices than the market can support. But Mill Creek’s Brindell said apartment over-building is unlikely in the near future.
Dramatic downsizing during the recent lean years has reduced developers’ production capacity, and lending is still constrained by historical standards, he said.
Indeed, although Douglas pitched in as an investor, Epstein said he was hard-pressed to find traditional financing with reasonable terms for his Shores project in Marina del Rey. Lenders are still reluctant to risk funding real estate development after the market crash.
“It doesn’t matter that I had over 60 years of experience with banks with never a problem,” he said.
The project was only possible with assistance from the Department of Housing and Urban Development, which helped him secure a $125-million loan backed by Fannie Mae.
With economic and demographic trends encouraging apartment living, developers who can find financing, navigate the local government approval process and perhaps face down neighborhood opposition can prosper — at least until the real estate cycle changes course again.
At some point there will be a big enough supply of apartments to put downward pressure on rents, reducing landlords’ profits. Meanwhile, home prices continue to decline in many markets.
“It’s a balancing act,” UCLA’s Gabriel said. “We will eventually reach a point where it will be cheaper to own than rent.”
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