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Apartment Owners Prefer Selling to Retrofitting

Apartment sales have soared this year in the San Fernando Valley and outpaced L.A. County overall in sales value and activity, according to a recent report by Marcus & Millichap Inc. in Calabasas. Joshua Luchs, the company’s vice president of investment, attributes the record-breaking surge to sales of apartments by property owners reluctant to retrofit their buildings to withstand earthquakes as now required under a new law. “They are fearful,” Luchs said. “You can offset a portion of the cost and it becomes a tenant responsibility. But if you have a 10-unit building and five are close to the market (rent) rate or at market, you’re not going to increase their rent.” In October, the Los Angeles City Council passed an ordinance requiring owners of apartment buildings with certain types of construction to seismically retrofit those structures so tenants stay reasonably safe during earthquakes. Apartment building deals climbed 13.3 percent year-to-date, compared to the same period last year, with transactions worth more than $1.7 billion, according to the brokerage. The average deal was worth more than $9 million. The average price per unit grew 2.6 percent to more than $230,000. The most active neighborhoods were North Hollywood, Glendale, Sherman Oaks and Van Nuys. As many apartment building owners are small, mom-and-pop owners, the costly and paperwork-heavy seismic retrofit is more than many are willing or able to handle, Luchs said, and they are selling instead. “Some of the bigger owners are not scared, and viewing that as an opportunity,” he added. Owners who want to sell before more apartments come onto the market and prices begin to drop are driving the fast pace of activity, Luchs said. “You’ve got to be a little bit ahead of the curve, and if not, you’re going to be left holding the bag, and you will have to do it yourself,” he said. Lower interest rates are another driver of the activity, Luchs added. In terms of renters, the broker forecasts the next hot market will be Canoga Park, as rents continue to increase in the Warner Center area of Woodland Hills. Sublease Options As office rates rise, tenants with a lot of time left on existing leases – or even those approaching renewals – have an option in subleasing unused space to other tenants. Subleasing is on the rise in L.A. County’s office market, according to a July report by NAI Capital Inc. in Encino. Asking rents for subleases are rising higher than direct lease rents in the second quarter compared to the same year-ago period. The amount of space available for sublease has also dropped and the gap between rents for subleased space versus direct leased space rents is closing, according to the report. Why? Tenants are using less space and looking to minimize costs, according to the report. But that’s not happening in the San Fernando and Santa Clarita valleys – at least not yet, said Forrest Blake, NAI vice president and author of the report. The amount of space available for sublease in the Valleys fell to 583,000 square feet in the second quarter from 636,000 square feet a year ago, Blake said. And sublease rents also have stayed almost flat at $1.98 a square foot in the second quarter versus $1.96. “The Valleys, at least in that capacity, are doing a bit better,” Blake said. But with office rents rising, especially for Class A space, subleasing may soon follow. Office rents in the second quarter jumped 12 percent to $2.35 a square foot compared to a year ago, according to Blake. Colliers International in Irvine reports similar increases. The Central Valley saw rents jump 11 percent to $2.36 a square foot. And in the Santa Clarita Valley, rents jumped 6 percent to $2.44. If businesses need to cut costs, renegotiating a lease for less space is one strategy. But for those in the middle of a lease, consolidating their square footage and subleasing it can reduce costs immediately, Blake said. Moving Up Coldwell Banker Commercial Advisors in Glendale has named Rob Cord as president to grow the business nationally and continue overseeing the asset services division. Cord replaces Lew Cramer, who had been serving as president and chief executive. Cramer will remain chief executive. In his prior position as president of CBC Advisors’ asset services division, Cord tripled the number of properties in the portfolio since joining the company in 2015, CBC Advisors said. Staff Reporter Carol Lawrence can be reached at (818) 316-3123 or clawrence@sfvbj.com.

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