Publication: Multi-Housing News
Author: Therese Fitzgerald, Contributing Editor
Date: February 1, 2006
With strong job growth and population gains and some of the highest home prices in the nation, Southern California’s apartment market is robust. “You have occupancy that exceeds 95 percent everywhere and, in most areas, exceeds 97 percent,” said Delores Conway, director of the USC Lusk Center’s Casden Real Estate Economics Forecast, “and annual rent increases of 3 to 8 percent, where the national average is 2 percent.” Add in the high barriers to entry for developers, including a scarcity of land, and you have one of the hottest market picks for real estate investors. “The investment market cap rates are quite low & help if lots of people are trying to buy,” said Conway.
In Los Angeles, effective rents are expected to increase 5.2 percent to $1,350 as concessions decline, according to Marcus & Millichap. The year-end 2005 vacancy of 3.4 percent is expected to drop to 3.2 percent in 2006.
New supply has been concentrated in the condo market, particularly in Downtown L.A. where industrial properties, hotels and older apartment properties are being converted, and a number of new high-rises are being developed. KB Homes and Anschutz Entertainment Group, for example, will build a 50-story hotel and condo tower (250 units) next to the Staples Center, and Lennar Properties is planning 700 condo units nearby. “Downtown L.A. is going to be a very exciting place when you see what has gone on and what continues to go on,” said Steve Friedman, national director of housing for Ernst & Young.
But, while investment activity remains vibrant, development and conversion in L.A. seems to be slowing due to ample supply, rising mortgage rates and increased construction costs. “People are not paying $100 a foot to convert older buildings,” said Janet Neman, a managing director in the West L.A. office of Charles Dunn & Co. Charles Dunn Senior Vice President Charles DeSantis recently brokered the sale of the Metropolitan Hotel on Sunset Boulevard in Hollywood to D.S. Ventures LLC. According to Desantis, the investor is not sure if the building will be condo or rental.
In Orange County, where the median home price of $700,000 is the highest in the Southland, effective rents will rise 6.5 percent to $1,410, according to Marcus & Millichap. Irvine Apartment Communities Senior Vice President of Operations Kevin Baldridge said that, while always healthy, the rental market in Orange County took off last year when housing appreciation peaked. Irvine Apartment Communities has two rental properties in lease-up at Irvine Co.’s Woodbury project, and it hopes to have the first move-ins this month at the Village at Irvine Spectrum Center, which will eventually be a 1,500-unit complex.
But while soaring house prices have bolstered the renter ranks, many developers are still betting on for-sale apartments. Sares Regis President Jeff Stack said he is confident even though higher interest rates and increased pricing have taken some residentsalong with some speculatorsout of the market. Sares Regis just rolled out the first units of its Watermarke project [see sidebar], and it has another 1,200 units in various stages of construction. “The for-sale market is starting to slow down,” said Stack. “It is not cratering but rather getting into more of a normal state.”
Last month, Thompson/Dorfman Residential Partners, in partnership with Opus West, sold the first phase of a completed 404-unit apartment property in Irvine, Calif. to K. Hovnanian, which plans to offer the apartments as for-sale housing. “There seems to be a pretty deep market for condos,” said Thompson/Dorfman Principal Bruce Dorfman.
But getting land entitlements remains tricky business in Orange County, particularly when cities require projects to have an affordable element. Mixed-use projects in transportation corridors will have an easier time. “If you can live and work and play in the same place, that is an incentive,” said Kitty Wallace, a senior vice president in the West Los Angeles office of Sperry Van Ness.
San Diego has already started to see a real cooling off of its once red-hot condo market. That’s because the city is well supplied and housing prices are leveling off, causing speculators to look elsewhere for the quick pop. “People still very much want to live in San Diego, but the price appreciation has slowed,” said Conway. “There have not been as many conversions as there were 18 months ago.” San Diego’s rental apartment market, meanwhile, is among the tightest in the country, according to Marcus & Millichap. The vacancy is expected to drop from 3.5 percent to 3.2 percent, and effective rents are expected to grow 5.5 percent to $1,240 per month.
In the Inland Empire, which is less land-constrained than other submarkets, there are currently 6,000 apartment units under construction with roughly half of those expected to be delivered this year. But job growth, population gains and decreasing single-family home affordability ensure those units will be absorbed. According to Marcus & Millichap, the vacancy rate for Riverside and San Bernardino will rise 30 basis points to 4 percent this year. “Even if you seal the borders,” Conway noted, “millions of people will still occupy housing in Southern California.”