As the real estate market deteriorated last year, one bright spot stood out for investors: apartment buildings.
The thinking was simple. Homes and condos may go in foreclosure but people still have to live somewhere. Now it appears even that safe haven is gone amid the brutal recession.
Scared investors are holding on to their money as rising unemployment has emptied apartments, lowering rental incomes. What’s more, the continuing credit crunch hasn’t made it any easier to close a deal.
“There is so much fear and uncertainty out there driving buyers that have cash back to the sidelines,” said Dave Casper, a senior investment adviser for Hendricks & Partners Inc., in the multifamily brokerage’s West L.A. office. “Our volumes are down significantly.”
Indeed, data provided by Hendricks & Partners to the Business Journal on multifamily properties of 10 units or more paint a bleak picture of the Los Angeles County market.
Just 564 large multifamily properties were sold in 2008, down 72 percent from 970 buildings the prior year. Those sales totaled $2.41 billion, off by nearly 50 percent from the previous year and it’s only expected to get worse. Hendricks projects rents will continue to fall, which will further soften sales.
A confluence of events has driven down the market.
Failing condo projects have been switched to rental properties in the last year, flooding the market with expensive inventory.
In addition, the recession has been worse than many feared, resulting in dramatic job losses and other financial hardships. In some cases, renters are doubling up with family and friends while others are leaving town. While cheaper rentals have fared better as renters trade down, the overall picture isn’t pretty.
Contrast that to a few years ago when jobs were plentiful and there was still strong rental demand despite the housing boom. As a result, multifamily buildings became popular with investors, lured in by easy access to credit, and seemingly ever-increasing rental rates and incomes.
Still, multifamily investors looking to unload properties these days appear to be suffering from the same inflated expectations that single-family home sellers clung to even as late as 2008 after the residential market had already crashed.
“I have gotten phone calls for listings, and if we are not on the same page with where the market is, I am not going to take the listing,” said Melika Jahangiri, an investment adviser with Sperry Van Ness who mostly sells Class C multifamily properties. “The last listing I took on was in September. I haven’t seen one deal that makes any sense since.”
Split market
One issue that has complicated matters: The multifamily market has split in two, with Class A luxury units being hit far harder than cheaper Class B and C buildings. It’s reflected in the Class A vacancy rate, which spiked 1.2 points last year to 6.5 percent. At the same time, the Class B and C market inched up to 3.6 percent as demand for the cheapest units held up.
“Frankly, the average Joe Six-Pack can afford a B or C unit much easier than an A market unit,” Casper said.
The Class A market has particularly suffered from converted condo projects that have flooded the market as the demand for condos has collapsed. In downtown Los Angeles, for example, Chapman Flats, the Brockman and Great Republic Lofts have all gone rental or announced plans to do so.
Projects like those, and the addition of newly constructed high-end rental projects, such as 5600 Wilshire Blvd. and Viridian both in the Miracle Mile area have created a glut of Class A rentals and taken a toll on rents.
The Viridian building at 5659 W. Eighth St. caters to wealthy and corporate renters. In September, units started at about $3,600 a month. But a representative in the sales office said that one-bedroom units now start at $2,468 and top out at $3,207, while two-bedroom units start at $3,354.
“The areas that have taken the biggest hits are the higher-end rental markets, including prime parts of West Hollywood, Los Feliz, and Beverly Hills adjacent,” said David Eitches, a Charles Dunn Co. multifamily market broker.
The rent decline was not reflected in 2008 data, but Hendricks & Partners is projecting that average rents will decline from $1,463 in 2008 to $1,448 this year and $1,453 in 2010.
Ironically, multifamily brokers said they expect to see more sales this summer, but only because properties taken over by banks because of foreclosures are expected to flood the market.
For now, though, the market is still filled with unrealistic sellers and unsure buyers. Take multifamily investor Zeke Warsaw.
He and his family own several properties around Los Angeles and are looking to make buys. Recently, he made an offer of $1.1 million for a 10-unit Koreatown building that was listed at $1.3 million and had “a lot of deferred maintenance.”
The seller rejected the offer, which Warsaw viewed as very reasonable. He doesn’t plan to make many more offers like that.
“Since that time, the stock market has gone down another 10 percent. It is unbelievable,” Warsaw said.
