Apartments Continue Steady Performance

LOS ANGELES-Apartments remained one of the favorite choices of investors in Los Angeles and the rest of Southern California in 2004, and that’s likely to continue, with cap rates to remain relatively low. “Barring a major change in interest rates, we don’t see cap rates moving much from where they are now,” says Lane Schwartz, regional manager of the local office of Marcus & Millichap. Schwartz tells GlobeSt.com that investors continued to view apartments as a reliable investment throughout 2004, as they have for a number of years now, for a variety of fundamental reasons: not a lot of new units are being built to compete with the existing stock; high housing prices prevent many people from buying a home and moving out of their apartments; and migration to California continues to increase the demand amidst an already existing shortage of housing. In addition, Schwartz points out, the already modest pace of multifamily construction slowed this year to about 5,400 new units from 5,800 in 2003.”The reduction in construction this year gave owners the opportunity to push rents without a lot of fear that they would lose tenants,” Schwartz says. He cites a recent report on the Los Angeles market by Marcus & Millichap that the county will finish the year with employment growth of about 1% (41,000 jobs), construction levels will remain modest, the population will expand by more than 100,000 per year, vacancy is on track to end the year down 40 basis points at 3.2% in the county, the average rent is expected to end 2004 up 5% at $1,219, and Downtown will remain the hot spot for apartment construction, with developers on track to complete a total of 1,800 units this year.The Marcus & Millichap report says strengthening fundamentals will keep apartment buyers motivated in the face of declining returns, with the median price expected to end the year up 10% from 2003 at $105,000 per unit. The upshot of these factors, Schwartz tells GlobeSt.com, is that “We don’t see much that’s going to change from what we’ve seen in the past few years.” The county remains a seller’s market, with plenty of buyers, especially for properties priced correctly.