Amy Wolff Sorter is a contributor to Real Estate Southern California, from which this article was excerpted.
The condo market had its boom time before a slump took hold due to overbuilding and a general housing crunch. Now, apartment owners are primed to take advantage. With their new leverage in tow, owners are looking at various ways to keep renters for the long haul by offering modern amenitites more often found in upscale homes or office buildings.
Trends are creeping in to increase more value to new, high-end complexes. Two trends generating some buzz are environment-friendly building methods and “intelligent buildings,” buildings that are wired to take advantage of Internet, WiFi and other technologies.
Though experts agree that viable green complexes are still a few years off–right now they’re too cost prohibiting to build–the technology aspect is definitely a demand factor, at least among tenants.
This demand is one reason why telecommunications giant New York-based Verizon Inc. made a $20-billion, 10-year commitment, through its Verizon Enhanced Communities, to wire existing and future single residences and multifamily properties with fiber. Once added, Verizon can offer services for voice and data to homeowners and tenants.
According to Eric Cevis, vice president of Verizon Enhanced Communities, apartment buildings are especially of interest to his company because this product type makes up a quarter of the service market. From a multifamily perspective, Verizon’s goal is to ensure that every multifamily unit is connected for fiber services.
With interest in and use of this service growing, particularly in the West Coast region, Cevis notes that owners and investors are using the wired capabilities as a marketing tool to tenants and future investors. “Research is showing that apartments with fiber technology are able to sell for a dollar value higher than a non-fiber building,” he states. “On the tenant side, they’re using the concept of the intelligent building to attract them, and it seems to be working.”
Scott Davis, a partner with the Costa Mesa office of Moran & Co. agrees that, from a tenant perspective, an intelligent building is certainly appealing, especially if that tenant has wired and wireless gadgets. It’s appealing from an ownership standpoint as well, as fiber or wireless connectivity makes rent increases more viable.
Davis is doubtful, however, that an intelligent building justifies a higher market price overall. “Where the benefit comes in here is the additional revenue that can be gained from the rent,” he explains. “If you can charge residents a certain amount, especially given today’s cap rates, you can increase the value per unit. But we haven’t seen an appreciable uptick on the investment end between buildings that are wired and those that aren’t.”
Regardless of whether a building is wired of not, the multifamily market in general looks “solidly positive” in most respects, according to the National Multi Housing Council’s most recent Quarterly Survey of Apartment Market Conditions. Multifamily demand, which includes lower vacancy rates, higher rents or both, has improved for 14 consecutive quarters. About 29% of survey participants say conditions in the markets in which they operate are tighter than they were three months ago.
In Southern California, job and population growth are strong, and with paper assets showing holes, real estate is becoming an asset of choice for many investors.Davis says the demand for SoCal apartment complexes isn’t exactly a new trend, but the impact is now being felt. “Historically, real estate in general was on the periphery and perceived as a higher-risk investment,” he says. Despite the fact that multifamily is management intensive, this property type does have two very positive upsides. One, it’s perceived as a lower risk. And two, the simple fact of the matter is, people need a place to live, and the price of single-family homes continues to be sky high.
That second upside doesn’t go unrecognized, especially in places like Los Angeles where housing production hasn’t been able to keep up with demand since 1990. According to a survey done by the Los Angeles Economic Development Corporation on Los Angeles and Ventura counties, due to the inadequate housing stock the number of people per household has increased. And nowhere is that more true than in Los Angeles where only 40.8% of the county’s housing needs are met.
Though there’s no question that additional complexes are needed, investors aren’t shoving a few million bucks into any old project. Davis says class A luxury complexes are the flavor of choice these days, especially when they reside in major metro areas, complete with barriers to entry.
“They’ll buy a deal in Dallas or Phoenix or areas without those barriers, but what really gets [investors] going is being able to invest in a supply-constrained market,” Davis adds. “On the West Coast that includes San Francisco and almost all of Southern California.”
Building and investments are occurring throughout a variety of SoCal markets, with experts pointing to Downtown Los Angeles (particularly along the mass transportation corridors), the Platinum Triangle of Orange County and the Inland Empire as hot spots.But Steve Donohue, president with Western National Property Management out of Irvine, cautions that demand, at least on the tenant side, could hit a slight soft spot in the coming months.
“You have a slightly slower job growth,” he notes. “The condo boom that was helping the industry for a time is gone. And now we’re seeing some condo developers converting back to rentals.” While a somewhat soft tenant demand won’t necessarily deter investors from sinking bucks into buildings, Donohue contends it does bear some watching.
Another trend that could put a kink in investing is financing. George Mitsanas, principal with Newmark Realty Capital Inc. in Los Angeles, has seen a disconnect in the market–the difference between cap rates “and what we call the ‘loan constant,’ of interest rate with amortization,” he says. “Many lenders are offering interest only, and that interest rate, in many cases, is higher than the cap rates investors are paying.”
On the other hand, Mitsanas realizes the appeal that multifamily has to investors, and why they’re willing to settle for such financing odds. Tenants renting class B and C buildings are those who need places to live, so they will consistently be filled. But class A types are a little different. “That’s more of a lifestyle choice,” Mitsanas notes.
To many outsiders, owning and managing multifamily real estate can be pretty labor-intensive. But with the availability of quality property management and leasing services, this doesn’t seem to concern investors. Because of that, and because of the continued demand for units throughout Southern California, multifamily properties will likely continue to be solid assets for investors in the short- to mid-term.
Donohue predicts, however, that the short term could be soft, depending on the submarket. “You have a little slower job growth and a lot of development in areas such as the Inland Empire,” he says. “The condo boom that was helping the industry is gone and some of that will come on line as supply.”
He does note, though, that his prediction is “soft,” rather than “slow.”