Western markets have had varying performances in the multifamily sector. Western Real Estate Business recently spoke with a few brokers to see how the multifamily market is faring in their areas. The following are the comments of Marty Shelton, vice president of NAI Capital Commercial in Los Angeles; Bill Fox, senior investment advisor at Hendricks & Partners in Albuquerque, New Mexico; and James Divincenti, senior investment associate at Marcus & Millichap in San Francisco.

WREB: What trends do you see presently in the multifamily markets in which you work?

Shelton

Shelton: A trend taking hold in West Los Angeles is the conversion of office and industrial properties to residential uses. It is more common in other parts of the country but it is now being embraced by city officials in Los Angeles and surrounding communities. Converting old office buildings to residential properties has been the driving force behind the revitalization of downtown Los Angeles.

Fox: Albuquerque has a seasonal market so there will be a downturn in occupancy for the fourth quarter 2003 and first quarter 2004. The city is on pace for another record home-building year, which is forcing [multifamily property] owners to place rent increases on hold, except for the Class A properties in the strongest submarkets.

Divincenti: Rents in San Francisco have stabilized, with some increases, after a 2.5-year decline.

WREB: What factors help owners decide which multifamily properties to buy and sell in the current market conditions?

Shelton: Rent growth as it relates to appreciation in value still seems to be what investors are looking for in apartments. On the sell side, the high prices have the owners selling. A prime property on the west side of Los Angeles can demand sub-6 percent cap rates.

Fox

Fox: [Multifamily owners in Albuquerque look at the] age of the properties, existing debt (and any pre-payment issues), current condition and whether or not to “recondition” up to market standards or sell and exit the market or 1031 into a newer property, possibly in a better location. Institutional owners have been exiting the market and following the trends to larger markets.

Divincenti: Low interest rates and strong demand for apartment buildings worth $2.5 million or less [are major factors in the San Francisco market].

WREB: How do current vacancy rates compare to 1 year ago?

Shelton: Vacancy in the L.A. basin averages 3 to 5 percent, depending on the submarket, and has not changed much from a year ago. It is not uncommon to find a property 100 percent occupied. Concessions can be found in new construction or areas where there has been new development and existing properties are competing for tenants.

Fox: Overall occupancy for Albuquerque is 92 percent, very similar to figures at this time last year. Owners continue to offer concessions to keep occupancies up, with the exception of Class A properties, which are able to raise rents and still operate at 96 to 97 percent occupancy.

Divincenti

Divincenti: The San Francisco area is experiencing 3.5 percent vacancy rates, which are a percentage point lower than 1 year ago. There are no more concessions being given.

WREB: What is the range for rental rates?

Shelton: Rental rates range from $1 per square foot in outlying areas such as Lancaster and Palmdale to $2.50 per square foot in Marina Del Rey. Los Angeles County has about 80 different submarkets and rental rates vary based on the class of the property and the submarket the property is in.

Fox: Rental rates range from approximately 57 cents to $1.10 per square foot in the metro Albuquerque area.

Divincenti: In the north end of San Francisco, studios are $1,200 to $1,500 per month; one-bedrooms range from $1,600 to $2,500; two-bedrooms from $2,000 to $3,000; and three-bedrooms from $3,000 to $6,500.

WREB: Please name some significant developments recently completed or planned in the area and the impacts they will have on the market.

Shelton: One significant multifamily development, Playa Vista, will add more than 2,000 for-sale and rental units to the westside market. In downtown L.A., there are more than 5,000 units either completed, under construction or in the planning stages that could forever change downtown L.A. into a 24-hour environment.

Fox: The Aspens in the northwest submarket is in its initial lease-up phase, which will affect occupancy rates for 12 to 18 months. The Broadstone is an upscale property of 216 units located in northeastern Albuquerque with rates approximately 10 cents per square foot higher than other properties in the area.

Divincenti: Most new developments [in San Francisco] are taking place around PacBell Park or south. There are some proposed projects in the mid-Market Street area.

WREB: Name some of the most active multifamily developers in the market.

Shelton: Some of the more active multifamily developers [in Los Angeles] are Avalonbay Communities Inc., Legacy Partners, Archstone Communities Inc., Lincoln Property Company, Casden Properties and Fairfield Residential.

Fox: GSL of Portland, Oregon, has been very active as a low-income property developer [in Albuquerque]. There are very few opportunities for multifamily developers due to lack of available zoning and land. Also, Alliance out of Phoenix has been active, building Pentacle and Broadstone Heights — both Class A properties — in the past 3 years.

Divincenti: Trinity is proposing a 1,400-unit apartment complex in the Market Street area [of San Francisco].

WREB: Have any major sales been completed recently?

Shelton: The 360-unit Provence at Valencia in Valencia, California was purchased by RREEF Funds for more than $67 million. Terraces at Paseo Colorado, the 391-unit property in Pasadena, was bought by SSR Paseo Colorado for $98 million. Also, the 216-unit Villas at Rancho Palos Verdes was acquired by VRPV, LLC for $50 million.

Fox: [In the Albuquerque area,] there have been approximately 10 major sales totaling 2,333 units over the last two quarters, more than the total sales for the last several years. The average size was 233 units with an average age of 23 years and an average price of $38,550 per unit. Aimco, Equity Residential and Archstone all sold properties in the last two quarters.

Divincenti: Most sales in 2003 have been under $5 million. The largest one in escrow is the Klein Portfolio, which totals 4 buildings and 83 units. The property, which is worth more than $17 million, was scheduled to close in late September.

WREB: What submarket or corridor should people keep an eye on for the near future?

Shelton: The submarkets to keep an eye on are West L.A. and the San Gabriel Valley. These two areas are slated to receive funding to build rail lines that will ease traffic congestion and promote job growth when they come on line.

Fox: There will be opportunities in most submarkets, with a majority of new development occurring in the northeastern and northwestern quadrants [of Albuquerque].

Divincenti: Prime [San Francisco] neighborhoods were the hardest hit in the last rental downturn of 2001 to 2003. Those with the biggest upside are in the Pacific Heights, Russian Hill, Nob Hill, Marina and Cow Hollow districts.

WREB: What is your outlook for the multifamily market in your area?

Shelton: The regional economy [in Los Angeles] has not suffered to the same extent as in other markets; the L.A. area has continued to see a net in-migration of people. And, there has been relatively little new development in the market to offset the strength in demand. These factors have helped keep the apartment market strong, especially compared to other regions. Even with a possible increase in interest rates, I think the apartment market in Los Angeles will continue its robust performance.

Fox: Albuquerque’s economy is strong and is generating new jobs. Many jobs are being created as a result of the research and development in the nano- and microsystems technology being developed by Sandia National Laboratories and the University of New Mexico.

Divincenti: [The San Francisco multifamily market] is all positive from here going forward.

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