WESTERN SNAPSHOT, NOVEMBER 2007

Los Angeles Multifamily Market

Ellis

As pockets of Los Angeles embrace the density associated with an urban metropolis, the new, major apartment developments will increasingly be mixed-use and transit-oriented.  The most significant development planned downtown (on Bunker Hill near First Street) is Eli Broad’s $2.1 billion Grand Avenue project, which will include up to 2,600 new housing units. The 3.6 million-square-foot development will also feature 449,000 square feet of retail, restaurant and entertainment uses, plus a new hotel and a 16-acre park on what is now the County Mall complex.

Developer David Houk has announced plans to develop Park Fifth at Fifth and Olive streets, overlooking Pershing Square. This project calls for 732 residential units in towers of 43 and 76 stories — creating what would become the tallest residential tower west of Chicago — plus a 14-story, five-star hotel. In the South Park neighborhood, the South Group is developing a trio of new condominium complexes: Elleven, completed in 2006; Luma, opened in mid-2007; and Evo, scheduled for completion in 2008. They are positioned to benefit from LA Live and downtown’s first modern supermarket, Ralph’s, which opened in third quarter 2007.

Advancing the cause of the full-fledged renaissance of Hollywood is the recently approved BLVD 6200 project to be developed by New York’s Clarett Group. This mixed-use development, located on both sides of Hollywood Boulevard at Argyle Avenue, east of Vine Street, will contain more than 1,000 residential units, 40,000 square feet of live/work space, and 175,000 square feet of retail and restaurant uses in a total development size of approximately 1.1 million square feet.  The LEED-qualified project will provide preferential parking rights to tenants who own and drive hybrid vehicles.  The seven-acre development site is owned by the Nederlander organization, which also owns the nearby Pantages Theatre. 

The largest transit-oriented project in Los Angeles’ history was just approved:  Art Wave, a $1.3 billion development, which will comprise 560 apartment units, more than 1 million square feet of office, 160,000 square feet of retail and 6,200 parking spaces, will be built on a 15.6-acre site owned by the MTA in North Hollywood, where the ends of the Red and Orange lines connect.

Let’s Make a Deal

While the demand for units remains high, the investment climate has cooled slightly during the last year, with the average price per unit (regionally) dropping approximately 2.5 percent to $167,000. In the first 6 months of 2007, apartment sales in the region totaled approximately $2.51 billion, reflecting a 29 percent decline in invested capital from the $3.52 billion during the first 6 months of 2006. 

However, there is no shortage of buyers for good quality product at a solid location. In May, Blackrock Realty Advisors completed the purchase of a newly-built 138-unit apartment complex near the Red Line Station in Studio City for $56.2 million, equating to $407,246 per unit or $430 per square foot. 

And while the demand for condo-conversion projects has cooled off, it has certainly not died out. During the summer, Wayne Ratkovich sold the 64-unit low-density complex at 415 S. Orangegrove Circle in Pasadena for $32 million or $500,000 per unit.  The buyer, ColRich of San Diego, proposes to convert this 1956-built complex to condominiums. 

The Chateau Toluca Apartments, a two-building complex with 145 units at the edge of Burbank’s entertainment core, recently sold for $42.75 million, just under $295,000 per unit. This property was acquired by another out-of-state developer, JPI Development Partners (James Morgan) of Texas. 

The westside submarkets continue to hold the lead in both highest rents, at an average of more than $2,000 per month, and lowest cap rates, which are typically around 5.25 percent. In terms of investor preferences, similar cap rates are found in the San Fernando Valley, although rents there are typically in the $1,600 range.

Back to the Future

Los Angeles County will add almost 100,000 people per year for each of the next 5 years.  Even with 29,000 new jobs being added in 2007, affordability for housing ownership is hovering near all-time lows. So there will be thousands of newcomers with steady incomes seeking out apartments in the city. With only 5,500 new units expected for completion in 2007 (just a slight increase from the 5,100 in 2006), there is no indication of any slack in the demand for apartment units. At mid-year, the county’s overall vacancy rate was 3.4 percent. By year-end, rents are expected to be at an average of $1,400 per month, 6 percent higher than they were on January 1. In areas where there is some development occurring, including downtown L.A. and the San Fernando Valley, the rents for these new units will push average rents up even faster. In addition, Los Angeles apartment owners are attempting to rescind the Los Angeles rent stabilization ordinance.

Recent changes in the credit markets have resulted in noticeable increases in cap rates for most apartment projects. Increases of 50 basis points in cap rates have been typical in most areas. However, with the anticipation of continued increases in rents, these rising cap rates are translating into only modest price declines. In some of the stronger submarkets (particularly on the westside), there has been no perceptible decline in pricing as lenders have been willing to maintain a fairly aggressive posture in these exceptionally strong submarkets. 

While the near-term investment outlook is somewhat clouded by the possibility of a recession on the horizon, existing apartment projects will remain viable investments in high demand by the ever-expanding population and work force of Los Angeles.

John Ellis is the managing director of the Los Angeles office of Integra Realty Resources. 

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