Back to Press Room

In the News

July 11, 2017

Investor demand for South Bay apartment buildings contributes to rising rents

Daily Breeze

Megan Barnes

Apartment buildings are a hot commodity in Southern California these days, with the number of sales tripling since the recession and 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, show figures from commercial brokerage Kidder Mathews.

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.

The South Bay had 632 apartment transactions last year, Kidder Mathews reported, up from 272 deals signed in 2010. Southern California saw apartment transactions jump to almost 4,200 last year, up from 1,264 in 2010.

Prices are up, too.

Investors paid an average of $230,322 per unit for South Bay apartments last year, up 84 percent from 2010. Regionwide, prices were up 43 percent from 2010 to $203,729 per apartment unit last year.

VALUE ADDED

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 turnkey 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.

In the South Bay, value-add deals are on the rise in neighborhoods undergoing gentrification in Inglewood and Hawthorne.

That's largely due to the future $2.6 billion NFL stadium, an under-construction Crenshaw/LAX Metro rail line and the planned redevelopment of the Hawthorne Plaza mall, said Brian Heller, vice president of SVN, a commercial real estate brokerage firm in Los Angeles.

Last year, Heller brokered deals for renovated apartment complexes in both cities.

"Inglewood's run started a few years ago and now a lot of that has gotten expensive, so Hawthorne is the next logical place," he said. "A real key element to both Inglewood and Hawthorne is they're non-rent-controlled markets."

Heller said when the Hawthorne Heights Apartments, a 26-unit complex on Lemoli Avenue, changed owners and was renovated with new hardwood floors, granite counters, appliances and upgraded fixtures, about half the tenants stayed.

"One of the interesting things I know the owner expressed to me was a few people had given notice and they went to look for other places and they couldn't find anything else as nice and affordable in Hawthorne because it had been going up quickly," Heller said. "They realized these guys were actually on par with the market, so it made more sense to stay."

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

"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, Proposition 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 so far this year.

"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

Barbara Craig, an attorney in San Pedro who specializes in tenant law, has heard from many frustrated renters facing displacement because of rent hikes.

But in South Bay cities without rent control, they have little recourse.

"When a non-rent-controlled tenant gets a massive rent increase and they're asking, 'What do I do?' I tell them to talk to the landlord to see if they can make some sort of arrangement or figure out another alternative because that is the landlord's prerogative," she said. "Unfortunately, they just fall into that category."

Craig believes value-adds are on the rise because people feel the market is right for investment again.

"Because in Los Angeles, there are more renters than homeowners, if you can get a property and put four families in four units instead of one single-family home, investment-wise, it makes sense," she said.

Another reason could be the popularity of reality shows about fixer-uppers, she said.

But first-time investors inspired by TV shows don't always do their research.

Craig has received calls from buyers who purchased cheap properties in the Harbor Area only to be surprised they are subject to rent control.

"Those are the not so savvy investors," Craig said.

DETRIMENTAL EFFECTS

On a per-capita basis, Los Angeles County had the most transactions in the region: 19 deals for apartment buildings 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 nine 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.

Back to top