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San Fernando
Thursday, Jun 8, 2023


By SHELLY GARCIA Staff Reporter When Katherine Bergh, a broker with Hendricks & Partners, recently ran an ad to sell an apartment building in Panorama City, she got about 70 calls. “Two years ago, I may have gotten 15,” she said. Good news for the market in apartment buildings? Not necessarily. “Buyers are a dime a dozen,” Bergh said. “We need to get people to sell. Sell. Sell. Sell.” While the ranks of those wanting to invest in apartment buildings swell, the supply of properties has all but dried up. Many owners are holding onto their buildings, believing that they will increase in value over the coming year. And those who are willing to put their properties on the block are asking for prices higher than the market will bear. “In the last six months, there has been a dramatic increase in terms of demand and there hasn’t been an increase in sales,” said Jonathan A. Weiss, regional manager of Marcus & Millichap, an Encino brokerage. Apartment owners, who for most of the past decade have faced double-digit vacancy rates that kept their buildings from turning a profit, are seeing vacancies decline to near record levels. And now that their buildings are generating income for the first time in years, they expect building values to rise as well. “This is the best season (owners) have had in over 10 years,” said H. Bruce Hanes, president of Hanes Investment Realty Inc., a Westlake Village-based brokerage that specializes in apartment buildings. “So what they’re trying to do is recoup some of their equity.” Last year, more than 400 apartment buildings of five units or more were sold at prices of $500,000 and higher, according to a report just released by Marcus & Millichap, an 18 percent increase over the prior year, when 337 such buildings changed ownership. But so far this year, listings have declined for most brokers, in some cases precipitously. In the first quarter of 1999, apartment transactions in the San Fernando Valley plummeted to 17 at Hendricks & Partners, down more than 50 percent from the same period in 1998, and the dollar value of those transactions dropped even more significantly, to $27.8 million from $80.8 million in the comparable period last year. Though brokers caution that one quarter isn’t enough time to judge the full impact of the stalemate in the market accurately, they agree that the outlook, at least for the next six months, is not promising. “We see the number of transactions slowing to a substantial degree in the next six or seven months,” said Hanes. Apartment vacancy levels in the Valley hovered in the double digits through most of the recession. But by last year, vacancies had declined to an average of 6 percent, even lower in some choice communities like Sherman Oaks. With their buildings nearly full, owners are once again raising rents. The average monthly rental rate in the San Fernando Valley increased 3.8 percent in 1998 to $779, according to Marcus & Millichap. Some areas, like Sherman Oaks and Studio City, posted 4 percent increases to $832 a month. Until now, secondary markets like Van Nuys and North Hollywood lagged behind, mostly because lower rents in prime areas drew tenants who otherwise could not have afforded them. But now that rentals have increased for class-A properties, less affluent tenants have no choice but to return to class-B and class C buildings, and as vacancies decline in those areas, rents are also on the rebound. According to some estimates, rents across the Valley may rise by as much as 4 percent in the coming year. “You call the owner, and the owner is not as incentivized to sell his property because his cash flow is pretty healthy,” said Raffi Krikorian, managing partner at Sperry Van Ness, a brokerage in Encino. “Even if he wants to sell, he’s looking at the market and saying, ‘Maybe I should wait another six months, and I can get more.’ ” Fueling the market further are expectations that demand for apartment units will continue to rise. According to the Marcus & Millichap report, the Valley will add another 32,000 households by 2002, with 14,400 of those households projected to fall into the apartment renter category. With little available land to develop new apartment buildings, construction is only expected to satisfy 25 percent of that projected demand. Cognizant of all those factors, property owners are pricing their buildings accordingly. “There’s a lot put on the market at ridiculously high prices,” said Bergh. “It’s definitely a seller’s market and you can ask what you want.” In the first half of 1998, the average cost of a 30-year-old building in Van Nuys was $35,082 per unit, according to Hanes Invesment Realty. By the second half, the average had increased more than 20 percent to $42,128. When Krikorian at Sperry Van Ness analyzed the transactions his brokerage handled in the first quarter, he found that deals were going off at 96 percent of the asking price. A few years ago, deals typically closed 5 percent to 10 percent short of the asking price. At Marcus & Millichap, one recent deal went off at 6 percent more than the asking price after the seller received three offers. Though that is somewhat unusual, Weiss said it is not uncommon for buyers to increase the down payment or shorten the amount of time they have to review a deal before it closes in order to help entice sellers. Of course, many buildings still aren’t selling at all. During the real estate boom of the 1980s, buyers paid record prices, believing that the value of the property would increase dramatically, and many got caught short when the recession hit. This time around, they are focusing on the actual cash flow the building generates to justify prices. While that has persuaded some buyers to pay the asking price for newer buildings, it has also made many older buildings under rent control unattractive at the asking rates. “As an apartment building increases in value, the cash flow drops unless you can keep the rent increasing at the same percentage, which can’t happen with rent control,” said Todd S. Schwartz, senior associate at Hanes. Rent controlled apartments, which comprise most of the apartment inventory in the city of L.A., have a 3 percent annual cap on rental increases, a rate too low to make many of these building pencil out at the asking price. At Hanes, brokers spend a lot of time educating sellers to the arithmetic of these transactions. But most agree that only time will help restore the balance between buyers and sellers. As sellers see that their buildings are not selling, they will begin to reduce prices in line with the expectations of buyers. Until then, brokers won’t be courting buyers. As Bergh said, “They’re a waste of time.”

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