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July 07, 2017

As investor demand for apartments rises, so do rents in Southern California

The Orange County Register

Jeff Collins

Tenants at Tustin's Palm Garden Apartments have seen two or three rent hikes since the aging apartment complex first sold to new owners in 2016, with rents jumping as much as $500 within five months.

At the Olive Street Apartments in Anaheim's Packing District, new owners are requiring month-to-month tenants to sign a one-year lease or move out.

And last year, an investment firm that purchased an eight-unit apartment building in East Los Angeles raised rents from $1,250 to $2,000 a month, which is 90 percent of one tenant's monthly pay. All but one family, which continues to fight its eviction, were forced out.

Apartment buildings are a hot commodity in Southern California these days, with transactions tripling since the recession and sale prices steadily climbing.

In many cases, new ownership can be a blessing, bringing upgrades, renovations and new amenities, like fitness centers, storage, dog parks and barbecues.

But often, they're a curse, with rents tending to go up once a complex changes hands.

"On a risk-adjusted basis, (the apartment sector) is the best asset in real estate," Douglas Bibby, president of the National Multifamily Housing Council, said during a break at the state builders conference in San Diego last month.

But if investors are buying properties to raise rents, he added, "that's not helping affordability."

THE DRAW

Apartments are like catnip to investors.

Rents are up, vacancies are down and the number of renters is increasing.

Southern California asking rents climbed 29 percent in the past six years, averaging $1,607 a month this year, up from $1,246 at the start of 2011, figures from commercial brokerage Kidder Mathews show.

Meanwhile, vacancy rates averaged 4.1 percent throughout the region for the past two years.

Southern California gained almost 180,000 renter households from 2009 through 2015, the most recent U.S. Census figures show. Homeownership, meanwhile, fell by 44,000 households.

"Home prices are ridiculous. It keeps people in the rental market longer," said J.C. Casillas, vice president of research and marketing at Encino-based NAI Capital. "People look at apartments as a safe investment."

As a result, sales and prices are soaring, Kidder Mathews figures show.

Southern California had almost 4,200 apartment transactions last year, Kidder Mathews reported, up from 1,264 deals signed in 2010. Investors have already bought 2,475 apartment buildings this year so far.

Prices are up, too.

Investors paid an average of $203,729 per apartment unit last year, up 43 percent from an average of $142,762 per unit in 2010. For 2017 so far, the average price per unit rose to $209,165.

VALUE ADD

With higher prices come lower returns.

To offset that, investors are looking for buildings with a significant upside - called a "value add" in industry parlance.

While many investors are looking for turn-key properties that are easy to manage, others are searching for buildings with below-market rents, few amenities or needing renovation, all of which would justify higher rents.

"The rental upside, the value-add deals are definitely the darling child of the investment world today," said Adrienne Barr, an apartment broker with the West Los Angeles office of Berkadia, a commercial real estate brokerage.

"People are looking at ways they can roll up their sleeves," Barr explained. "They can't rely on rental increases alone because rents aren't going up as fast. They're choosing projects where they can raise values through renovation and management."

Barr was one of two agents who brokered the sale last December of Verdugo Village, a 126-unit complex in Glendale that sold for $54.2 million to a Bay Area apartment investment group. The new owners rebranded the complex as Towne at Glendale, with plans to add a fitness center while refurbishing common areas and the apartments themselves.

The renovations and higher rents are expected to increase revenue by nearly $709,000 a year.

"There was a tremendous value-add opportunity," Barr said of Verdugo Village.

NEW OWNERS, NEW COSTS

New owners who invest in renovations need to raise rents to pay off those costs, along with their mortgage and other expenses, which sometimes includes a construction loan.

"It's a business," said Peter Hauser, an agent in Berkadia's Irvine office. "Owners don't renovate just to spend money. They renovate because market conditions support it, and they get a revenue stream to support it."

Long-term owners with full buildings sometimes are less aggressive about raising rents, Hauser said. For one thing, Prop. 13 keeps property taxes low for existing owners. But those taxes jump to current market levels when a property changes hands.

"There's a lot of long-term ownership in Orange County, a lot of low tax rates," said Tyler Leeson, a broker with Marcus & Millichap's Irvine office. "When you're buying today, and you pay (today's) prices and your tax rates go up, then ... you have to raise rents."

Leeson said he has closed 41 apartment transactions this year so far.

"It's like any investment," Leeson said. "Very few people invest in anything that won't go up. ... Plus they can add value in the shorter term by increasing the rent and renovating the building. They're rolling up their sleeves and pouring their blood, sweat and tears into these buildings."

TENANTS LAMENT

These changes can come as a shock for tenants paying below-market rents to long-term landlords.

Amber Jefferson-Mattox, 39, wanted to shop for a bigger apartment, but now she's stuck at the Olive Street Apartments - where she's lived for five years - because her new landlord forced her to sign a one-year lease or leave.

Had she signed a lease before the Anaheim building's sale last February, her rent would have gone up $30 a month. By going month to month, she accepted a $140 rent hike. Then she had to sign a lease anyway, and the $140 increase stayed in place.

"Did I want to sign a new lease? No," Jefferson-Mattox said. "Now I'm stuck here to May."

Laura Peters, 35, long complained about maintenance problems at her Palm Garden apartment in Tustin, where she lived for 5 1/2 years.

But she also got by without a single rent increase during her first four years there. Rent for her two-bedroom unit went from $1,495 a month, utilities included, to $1,600 at the start of 2016.
Just before New Year's - after the first of two buyers took over - her rent went up to $1,695. In April, it went up again to $1,815.

"Nothing's upgraded. No dishwasher. Same carpet for 15 years," said Peters, who works in escrow and title for a mortgage company. "If you're going (to raise rents), justify it."

Leeson, the Marcus & Millichap broker who handled the second Palm Garden sale in April, agreed the complex needs work, saying the fencing is dilapidated and buildings haven't been updated in 30 years.

The new owner, who paid $27.5 million for the 23-building, garden-style complex, intends to continue renovation plans started by the previous landlord, Leeson said.

But more rent hikes also are planned.

Rents "were so far below market on this building," Leeson said. "The first rental increase was because there was so far to go."

DETRIMENTAL EFFECTS

On a per capita basis, Los Angeles County had the most transactions in the region: 19 apartment deals occurred there for every 10,000 renter households in 2015, the most recent year for renter data.

Riverside County was second with 12 per 10,000, followed by Orange County at 10 per 10,000 and San Bernardino County with 9 per 10,000.

But apartment transactions can have detrimental effects on tenants in a region where affordable workforce housing is scarce, said Walt Senterfitt, a founding member of the L.A. Tenants Union.

Many renters often end up forced to move when rents are raised following a transaction, he said.

"A lot of these real estate transactions are being marketed for that - as a value add," Senterfitt said. Investors are told, "You can raise the rents sharply."

"This can involve displacing and replacing the tenant with a demographic capable of paying," Senterfitt said.

An eight-unit building in East Los Angeles is a prime example, Senterfitt said.

All the families but one were forced to leave after an investment firm bought the property in early 2016 and raised the rent from $1,250 to $2,000 a month.

Roberto Perez, his wife, Carolina Rodriguez, and their six children - ages 3 to 20 - are the only ones left. But not because they can afford the rent hike.

Perez, 44, a roofer, devoted more than half his $2,250 a month paycheck to the paying the lower rent. Paying $2,000 a month would be impossible.

While their neighbors took relocation money the owner offered and moved elsewhere, Perez and Rodriguez couldn't find a place to move to. Their family is too big.

Rodriguez said the stress got to her. She began to overeat, couldn't sleep and her hair started falling out. She worries her family would end up on the street or that she'll have to leave East L.A., where she grew up and her mother still lives, and move to Texas.

When an eviction notice arrived last June, Perez and Rodriguez decided to fight. With support from the Los Angeles Center for Community Law and Action, an advocate for the poor, the couple argued in court their building was uninhabitable because of poor wiring, holes in the floors, busted doors and an infestation of cockroaches.

A jury ruled in their favor. The landlord made some repairs and filed for eviction a second time.

Perez and Rodriguez beat that attempt, too, arguing the repairs didn't go far enough.

Together with former neighbors, the couple also filed a federal lawsuit alleging discrimination, arguing the rent hikes had a "disparate impact" on Latino immigrants who occupied most of the building's units.

In a court filing, the building owner issued a blanket denial of the lawsuit's allegations. An attorney for the firm declined further comment.

The federal suit is pending. As is a third eviction case, filed last month.

Now Rodriguez is advocating for rent control in East L.A. and encouraging others to stand up for their rights.

"I actually don't know what's going to happen. ...Probably I'll get pushed out of my community and move somewhere else," Rodriguez said in a telephone interview last week. "I don't want to leave my mom. I don't want to leave East L.A. But they're not giving me any choice."

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