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Commercial Real Estate

Outlook Good for Area Rentals, Report Finds

Demand for apartments has dropped slightly, but Southern California remains one of strongest markets in the nation.

April 02, 2002|BOB HOWARD | SPECIAL TO THE TIMES

Owners of high-priced apartment complexes have taken some lumps during the economic slump in Southern California, but the recession has had less of an effect on moderately priced units and the region remains one of the strongest in the nation in terms of overall demand for apartments.

Those are some of the conclusions in a new report that shows demand has weakened slightly for apartments in the region but ranks Southern California apartment markets among the top 10 in the country in terms of how they are expected to perform in the coming year.

The report, issued by Palo Alto-based Marcus & Millichap, says the vacancy rate for luxury apartments in Irvine has soared to 9.2% and is expected to peak at 12% during the next year--compared with the 1% and 2% vacancy rates that prevailed in most of Orange and Los Angeles counties when the economy was growing.

Vacancies also have climbed at higher-priced apartment buildings in Los Angeles County, reaching 6.4% in Santa Monica and Marina del Rey.

Rents are rising at 2% to 3% per year in many high-priced neighborhoods that were commanding double-digit rent increases during the economic buildup. Luxury apartments represent approximately the upper 10% of the apartment units in any market.

Rents rose by as much as 13% in some moderately priced neighborhoods during 2001, and vacancies generally remained low for lower-priced apartments.

Despite the higher vacancies and flatter rent growth in the upper end of the market, Marcus & Millichap forecasts that Orange County will rank fourth, the Inland Empire fifth and Los Angeles County sixth in the nation during the next year in terms of demand for apartments.

The forecast is based on a statistical analysis of such factors as predicted job growth, the number of apartments expected to be built and the affordability of homes for purchase, said Harvey Green, Encino-based president of the company.

Those factors indicate that demand will continue to outstrip supply of apartments in Southern California, Green said.

One reason for the higher vacancy rates of higher-priced apartments is that low interest rates have made home buying competitive with renting.

"In some parts of south Orange County, the rents are about the same as a mortgage if you have a down payment," Green said.

In addition, Green said, new construction of luxury buildings added supply at the same time demand declined as a result of the economic slowdown and the Sept. 11 terrorist attacks.

The new supply includes projects in Orange County as well as "some unique new high-rise luxury apartment projects on the Westside [of Los Angeles] that will never happen again," Green said.

Despite some blemishes, the picture is positive for the region's apartment markets, said Green, who is "very bullish" on the region.

Investors share that optimism, said real estate broker Kitty Wallace of Sperry Van Ness, who specializes in properties in West L.A.

"When a luxury apartment comes on the market, there are still plenty of buyers," Wallace said.

A total of 180 apartment buildings were sold in 2001 in the Westside neighborhoods she specializes in, Wallace said, compared with 155 in 2000.

The number of higher-priced buildings that were sold (those going for more than $150,000 per unit) increased to 68 in 2001 from 43 in 2000.

Some Westside apartment owners are offering incentives such as a month's free rent to attract tenants, said apartment broker Laurie Lustig-Bower of CB Richard Ellis.

"We have seen some move-in specials that we haven't seen since 1995," Lustig-Bower said. "Owners are used to having virtually no vacancy, and now that some of them have 5% vacancy and it's taking longer to rent their units, some of them are getting a little nervous."

But many of the luxury complexes are more than 98% occupied, Lustig-Bower added, and their owners are not offering any concessions to prospective tenants.

The recession has produced no noticeable change in the vacancy rate at the approximately 3,000 San Gabriel Valley rental units managed by Pasadena-based Beven & Brock, said C. Finley Beven, whose firm has managed apartments in the San Gabriel Valley for 22 years.

"Our occupancy now is as high as it's ever been," Beven said. The units managed by the company have been 99% occupied throughout the last two years, he said, meaning that about 30 of the 3,000 units are empty at any given time.

Most apartments remain empty only a short time for cleaning or renovations, Beven said.

By comparison, Beven said about 100 of the company's units were empty during the mid-1990s, before the economic recovery of the mid- and late 1990s boosted demand.

Southern California's apartment markets have suffered far less from the economic slowdown than those in the Bay Area, according to the Marcus & Millichap report, which ranks San Jose 36th among the 40 markets in its study.

Sacramento ranks first in the study, and San Francisco, where some top-tier rents dropped by 20% to 25% in 2001, ranks 16th.

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