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July 23, 2017

Investor demand for Long Beach apartments contributes to rising rents

Press-Telegram

Andrew Edwards

For the past year, Josh Butler has been hearing from more and more renters in Long Beach in the same bind: A new owner has purchased their apartment complex with plans to renovate - and raise the rent.

"They usually come to us with some sort of huge rent increase they can't handle, or a 60-day notice that they have to clear the building out," said Butler, executive director of Housing Long Beach, a tenants' advocacy nonprofit. "We've seen rent go from $1,200 to $2,100 for a two-bedroom."

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 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 NAI Capital. "People look at apartments as a safe investment."

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

Long Beach had 574 apartment transactions last year, Kidder Mathews reported, up from 236 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 $169,682 per unit for Long Beach apartments last year, up 89 percent from 2010. Regionwide, prices were up 43 percent from 2010 to $203,729 per apartment unit last year.

Compared to other beach cities, Long Beach's rental market has been historically undervalued, said Eric Christopher, an apartment specialist at Inco Commercial, a Long Beach brokerage.

Apartment buyers have been able to take advantage of lending rates as low as about 4 percent, and that's something that's been a factor in the pace of transactions. Rising rates could constrain deals, but the prospect of being able to put rent increases into effect is a separate factor that may continue to entice buyers to Long Beach.

Long Beach landlord Elaine Hutchison said she has been "inundated" with offers from would-be buyers interested in purchasing her properties. She's rejected those offers, but says Long Beach rental properties will likely continue to change hands in the current market.

"It's only going to be a better place to invest in the future. I don't see it slowing down at all," she said.

The increase in transactions is due in part to older property owners retiring and looking to liquidate their holdings. That combines with an increasing amount of would-be buyers having the ability to complete deals.

"Among other things, the economy is better and people can afford to buy properties in the past that probably couldn't," she said.

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 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.

In Long Beach, Butler said contrary to popular belief, the highest rent increases aren't taking place in affluent areas, but in the 90813 and 90804 ZIP codes.

"We've been seeing it a little bit north of downtown and the Anaheim corridor, places that have much older housing stock," Butler said, adding that the city's lack of rent control is a major factor. "We've seen advertisements that say, buy this property in Long Beach, you can raise the rent 75 to 90 percent."

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

One way tenants have fought back when given eviction notices is to demand help relocating, Butler said.

"We've had successful rent strikes where the landlord will just give relocation assistance," he said. "But tenants shouldn't have to go on a rent strike. To get relocation assistance should be law."

As more renters face displacement, Butler said his group has been pushing for the City Council to pass protections providing just that.

"We think the city should certainly be playing a role in alleviating some of the pressure and pain in Long Beach," he said.

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

By contrast, Riverside County had 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.

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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