SHELLY GARCIA Staff Reporter Dramatic lifestyle changes, including an increasingly bi-coastal community of entertainment employees and the economic recovery, are fueling a boom in the luxury apartment market in the San Fernando Valley. High-end apartment buildings that charge rents ranging from $1,000 to $1,300 per month and more for two-bedroom units in Warner Center, Sherman Oaks and Studio City are drawing strong interest from real estate investment trusts. At the same time, private developers are targeting their efforts to building ultra-luxurious rental dwellings with architectural details formerly found only in private homes, and services and amenities that rival four-star hotels. Perceptions about home ownership “have changed in the last five years,” said Paul Jennings, co-chairman and chief executive of Public Communciations Services, a Los Angeles-based developer. “A lot of people got burned on real estate during the downturn, and demographics are such that people are much more mobile. They don’t want to get tied down, and if they work in the entertainment industry, they may be bouncing back and forth to New York.” PCS’s just-opened apartment complex, the Premiere at Sherman Oaks, vividly illustrates the trend. The 372-unit residence has its own movie theater for watching dailies on film shoots, a concierge service, valet parking and volleyball courts, among other amenities. With a majority of its units comprised of studios and one-bedrooms, the Premiere is expected to draw about half of its tenants from corporate clients and studios seeking temporary lodging for employees or film and television crew personnel. But the complex also includes 65 two-bedroom apartments geared to individuals who need long-term housing, and those units were fully rented in the first weekend of leasing. “It’s sort of a status building, and if you can afford these luxuries, why not?” said Myron Montgomery, corporate housing and leasing director. To be considered a luxury apartment, buildings must be in prime real estate locations in the Valley, that means Sherman Oaks, Studio City, Encino and Woodland Hills and have a range of posh amenities that may include tennis courts, health clubs, spas, dry-cleaning pickup and delivery services and washers and dryers and wood-burning fireplaces in the units. Tenants can expect to pay as much as 30 percent more than the average local rent for these amenities in these locations. Malik Corp. in Sherman Oaks has built eight such apartment buildings in the Valley since 1994 and currently has another five under construction. The company’s developments, in Sherman Oaks, Studio City and Toluca Lake, are smaller, ranging from eight to 30 units, with no swimming pools, but they feature such architectural details as drop ceilings in the kitchen, French doors leading out to patios, recessed lighting and ceramic tiles in the kitchen and bath. About a month before construction is completed, Malik hangs a sign to announce that the rentals, two-bedrooms at $1,325 to $1,350 a month, are available, “And we’ve been leased up for every building when we open,” said Wayne Burkamp, vice president and general counsel for the company. Another developer, Lincoln Property Co., which is working with Katell Properties on the mixed-use Warner Ridge site adjacent to Warner Center, expects to complete a 125-unit luxury apartment complex in the first quarter of next year. Its units will have a fully equipped gym and elegant clubhouse in the common areas, and washers and dryers and roof gardens in some of the units. “The idea is meeting the demands of people who could buy a house if they had the down, or if they wanted to,” said Don Henry, vice president of the Irvine-based development company. Real estate professionals say the market for these apartments leans heavily toward single professionals who might well be able to afford a home, but choose to rent instead, either because they don’t want to bother with the maintenance of a home or because they want the flexibility to adapt to changes in their career. “People are increasingly becoming renters by choice,” said Laren Barr, senior vice president for strategic planning and communications at BRE Properties, a REIT that just purchased a luxury apartment in Warner Center. “They don’t want to come home and mow the lawn or fix the toilet. They’re not confident that they’ll be in their position for more than a few years, so to make a commitment to a home is not always a good financial decision.” Others would prefer to rent in prime neighborhoods rather than own a home in less desirable areas. And still others, who may be able to afford mortgage payments, can’t manage the down payment required, and they’re choosing to live in luxury buildings that simulate the comforts of home owning. “Everyone’s leveraged to the max,” said Scott G. Miller, a CB Richard Ellis Inc. vice president based in the Sherman Oaks office. “So it’s a big deal to come up with a down payment. For successful people making good money, rent may be the only option because of the debt culture.” The industry doesn’t track the luxury apartment market specifically, but Malik, which specializes in the field, estimates that people looking to rent in these buildings represent 5 percent to 8 percent of the population. And given the continuing growth in the economy, “it’s not even close to saturation,” Burkamp said meaning there isn’t nearly enough supply to meet the demand. While developers like Malik and PCS tap into the entertainment industry with buildings located in nearby Sherman Oaks and Studio City, a number of REITs are focusing their acquisition efforts on Warner Center, where an employment boom is also underway. In June, San Francisco-based BRE Properties acquired the 250-unit Arbors at Warner Center complex, and Avalon Bay Communities earlier this year acquired the Warner Oaks and Viewpoint complexes in Woodland Hills. “We love the location,” said Michael Jara, acquisitions director for Avalon Bay Communities, an Alexandria, Va.-based REIT. “As the office market has improved, it’s created higher demand and we see upside potential in the rents.” More than short-term rental income, the REITs are interested in the appreciation potential of these properties. They reason that the dearth of luxury apartments in these exclusive neighborhoods, along with the lack of available space to build new properties, makes them highly desirable investments. As a result, Realtors report that in some cases, these properties have sold at cap rates (a measure of return on investment that takes into account the purchase price and the rental income potential) below the average market range of 7 percent to 9 percent, meaning investors are getting a lower return for their dollar. “REITs right now are very hungry,” said Jonathan Weiss, regional manager at Marcus & Millichap. “There’s no property to meet their needs.” REITs look for buildings that meet their luxury criteria with at least 100 units, and construction of these kinds of complexes “pretty much stopped in the late 1980s,” said Katherine Bergh, senior vice president for the investment services group of Grubb & Ellis. “There is only a handful (of these apartments) in each community.” At the same time, more buyers are becoming active in the market, figuring that the locations of these properties along with their proximity to bustling employment centers will pay off in the long run. “Yes, competition (to buy these properties) has increased,” said Avalon’s Jara. “There are a number of REITs who have existing property in Southern California who are active, and there are REITs who are trying to break in, and a number of private companies and individuals and pension funds competing. All these players have jumped in the market, and there are a bunch more now than there were a year ago.”
