Staff Reporter

Apartment prices are edging up throughout L.A. County, but perhaps nowhere is the market stronger than in Santa Monica where the pending relaxation of rent control is creating a seller's market again.

The median price for a Santa Monica apartment building in 1997 shot up 18 percent over 1994 levels to $93.55 a square foot.

By comparison, the countywide median sale price of an apartment building rose just 7 percent, to $57.63, according to Marcus & Millichap Real Estate Investment Brokerage Co.

"Santa Monica has just gone crazy on the investment front," said Laurie Lustig, first vice president of multi-family sales for CB Commercial Real Estate Services.

Santa Monica had one of the first and strongest rent control laws in California, but a state law will allow vacant units to go for market rents in 1999.

Lustig said investors are willing to take intially lower rental income for their investment in Santa Monica than they would for buildings elsewhere in the county because they're betting on "tremendous upside potential" once the vacancy decontrol law goes into effect next year.

The local picture for apartment investors is generally bright. New development is scarce, with Los Angeles ranking as one of the lowest construction markets in the nation.

And the countywide vacancy rate is at 7.8 percent, down from 11.7 percent in 1993.

The vacancy rate is even lower in Santa Monica about 2 percent, according to broker estimates.

Such scarcity will spark dramatic rental spikes, real estate industry officials say.

"I don't mean to sound cold, but there are a lot of nursing-home candidates among the Santa Monica apartment tenants," said Alex Nicol, vice president at Beitler Commercial Realty Services. "People are betting on attrition among the tenant base."

But while the price of apartments has been skyrocketing, the volume of sales has actually dipped. Fifty-six apartment sales took place in 1997, down 30 percent from 1994.

Brokers point to a variety of factors for the downturn, noting that there were almost three times as many bankruptcy-forced sales in 1994. In addition, they say, many landlords want to hold onto their properties as the market continues to appreciate.

Finally, some buyers have been reluctant to commit until the vacancy decontrol takes effect.

"Investors remained a little skeptical of what the local government would do," said Barry Baker, associate vice president at Grubb & Ellis' investment services group. "They were waiting for the other shoe to drop."

But that anxiety seems to have dissipated as the law's effective date moves closer and the market firms.

It was 1979 when Santa Monica enacted rent controls that prevented landlords from raising rents on new tenants. West Hollywood, the only other L.A. city that passed a strict rent control ordinance, followed suit in 1985.

Most cities, including Los Angeles, don't intervene when a landlord raises rents after a tenant moves. But ordinances in Santa Monica and West Hollywood kept rent control in place after a tenant left, allowing only annual modest increases.

Rent control laws dampen the desirability of an apartment because a landlord cannot generate an income stream through rental increases.

The state's "vacancy decontrol" law, passed in 1995, overrode those city ordinances. The law stipulated that effective in 1996, a landlord can increase rents 15 percent as soon as the current tenants move.

By January 1999, a landlord will be able to raise rents to whatever the market will bear when a unit is vacated.

Real estate brokers say they have seen escalating prices in West Hollywood as well, but not to the extent of those in Santa Monica.

One of the most newsworthy sales last year was the $25 million purchase of the 288-unit apartment building at 1431 Ocean Ave. by Douglas Emmett Realty Advisors, an investment firm. But most sales are among private individuals and involve a small number of units.

Wes Wellman, president of Wellman Realty Co. that specializes in Santa Monica apartment sales, said the actual volume of apartment sales is a fraction of the slew of interested investors who are "sniffing around" Santa Monica.

But Wellman said many lose interest when they learn that rent control won't end entirely in 1999. The law only allows vacated apartments to go at market rates; occupied units still operate under their rent-stabilized rents.

"There seems to be a common misconception that rent control is going away," said John McDermott, regional manager at Marcus & Millichap. "But people can still continue to pay extremely below market rate until they move out of their units."

And while the average tenant turnover for an apartment building is about 15 percent, real estate analysts say that only death or grave debt will wrench many Santa Monica renters from their beach-community units.

Herb Balter, who owns six small buildings in Santa Monica, said he's currently renting out a two-bedroom apartment that's four blocks from the beach for $450 month.

"Do I think they'll move out? They'll probably die there," said Balter, who is also president of the Action Apartment Association, a landlord's group in Santa Monica.

Brokers and investors say it's common for people who purchased Santa Monica buildings in recent months to hold units vacant for the rest of 1998, forgoing their rent-controlled income stream so they can put those units out at market rate next year.

Buyers looking in Santa Monica and West Hollywood have the additional concern of deferred maintenance. Landlords under rent control had no incentive to make their properties more attractive, so they often let needed cosmetic and operating repairs slide.

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