With condo demand slackening just as thousands of units come on line, some downtown developers are turning to a time-honored strategy to avoid vacancies: renting out condos as apartments.
Trammell Crow Residential finished construction in March on the Artisan on Second in the Arts District near Little Tokyo. Originally planned as a condo development, the 118 units are now being offered up as apartments.
It will be joined shortly by Ten Ten Wilshire, a 227-unit high-end executive complex just west of the Harbor (110) Freeway near Good Samaritan Hospital. Others could follow.
The decisions to lease out the units come as downtown condo prices are falling and some developers are halting projects altogether and at the same time, apartment rental rates are rising regionwide as more residences go into foreclosure.
"The demand for for-sale product was waning and there was strong rental demand in the downtown area," said Kimberly Paperin, managing director of Trammell Crow Residential. "We made the decision to switch from condos to apartments about a year and a half ago while we were in the middle of the construction process."
So far, the number of condo units being sold as apartments represent only a fraction of the condo units entering the market. This year a little more than 2,000 units are expected to come on line downtown, 300 more than last year, according to CB Richard Ellis.
Indeed, many condo developers haven't changed strategy. And top projects such as Anschutz Entertainment Group's mammoth L.A. Live mixed-used development, which features 224 luxury condominiums, is selling well, according to the developer.
But many developers acknowledge that renting out condos is an attractive alternative amid the credit crunch and softening market. Although the city requires developers to obtain permission to convert multifamily apartment projects to for-sale condos, no permits are needed to lease units once they have been approved for sale as condos.
Meruelo Maddux Properties Inc., the largest nongovernmental landowner in downtown L.A., has several multifamily projects under development, including the Union Lofts.
The 91-unit project on South Hill Street lofts is another example of a project entitled for condos that is being rented. McGonagle said the company's original plans called for rentals and it has decided not to sell them because of the softening market.
"The rate of increase of condo unit pricing has slowed whereas rental pricing continues to increase at an above average clip," he said.
The decision to lease out condos is being driven by slackening demand, which has reportedly prompted developers to halt or delay several dozen projects. Among the most high profile: the 50-story Zen tower on Third and Hill streets, and the Metropolis project near the Harbor Freeway.
Other developers have resorted to gimmicks, such as at Santee Village, where buyers are being given a three-year lease on a Mini Cooper car. Still, prices are down, reflecting the slackening demand as more condos come on line.
In the South Park neighborhood, 25 condo units were sold in March, up from just eight a year ago. But median prices were off 22 percent to $450,000, according to HomeData Corp., a Melville, N.Y., provider of residential sales data to the Business Journal.
Over the same period, apartment rents have risen throughout Los Angeles, although the rate of increase has slowed in the last quarter. The average asking rent increased 4 percent year over year in the first quarter to $1,949, according to market research firm RealFacts.
Ten Ten Wilshire will debut this spring as a rental property, although developer Amidi Real Estate Group insists the decision to rent the units was not motivated by the housing slowdown.
Principal Rahim Amidi said he and his partners like to hold properties long term, and with the downtown revival still in its early stages, they decided the property was a good investment.
"We felt that with everything happening in downtown L.A., this is just the beginning of having a true downtown where people can live, work and play," he said. The complex features a pool, gym and bar on the roof, and is aimed at the corporate housing market, with leases as short as one month.
The current wave of condo-to-rental conversions is not an entirely new phenomenon downtown. The Packard Lofts adaptive reuse condo project hit the market in June 2006 as apartments. The developer's strategy is similar to that of Amidi Real Estate Group.
"We did not want to sell it because we felt like the market has potential going forward, so we decided to rent it," said Joseph Emrani, managing member of Hope Enterprises LLC, the developer of Packard Lofts.
Downtown developers staying the course can look for a success story in the behemoth L.A. Live mixed-use project, with 4 million square feet of retail, entertainment and residential space.
The project includes a 54-story tower that will house a JW Marriott hotel and 224 luxury condominiums known as the Ritz-Carlton Residences. The condos, which will be delivered in two years, are being marketed at $1.4 million per unit and up.
AEG reports that buyers have signed sales contracts and put down nonrefundable deposits on two-thirds of the condos.
"The high-end condo market is not being hurt like the middle market, because people who have the ability to buy a second home or high-end condo in downtown L.A. are not worried about whether they can get a loan," said AEG Chief Executive Tim Leiweke.
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