Thursday, September 2, 2010
Long Beach's Condo Conversions Haunt Rental Market
by Don Jergler | Realty Bites | 09.29.09 |
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It’s a good time to be a renter—or perhaps a multifamily investor. Even with droves of would-be homebuyers sitting out the market—and many more had-been homeowners now entering the rental market as foreclosures continue to ouster folks from their domiciles—fundamentals in the rental market are putting downward pressure on rent prices.

Put plainly: Rents are getting cheaper.

And you can put the blame on high unemployment, apartment operators having difficulty finding qualified renters and the condo-conversion wave that swept across places like Downtown Long Beach that were desirous to attract the young professional crowd with a large cache of disposable income.

By some estimates rents have fallen as much as 10% in Long Beach, and rents are falling in varying degrees across Southern California.

For a hint of what’s to come, commercial real estate firm Marcus & Millichap’s report on Los Angeles County for the 3rd Quarter states: “Expect continued weakness in the apartment market.” According to the report, “persistent employment reductions will drag on apartment fundamentals in Los Angeles through the rest of 2009, despite limited new supply. International trade, a traditional economic driver in the region, has struggled mightily since the onset of the global recession.”

The report notes that the ports of Long Beach and Los Angeles have posted container traffic declines of 27% and 15% respectively so far in 2009, which has contributed to a drop in apartment demand. Additionally—and here’s where renters should take note—the report states: “Apartment operators are responding to the downturn by trimming rents and offering moderate concessions, trends likely to continue in the quarters to come.”

“On average rents have fallen about 10% in the last year,” says Nancy Ahlswede executive director of Apartment Association, California Southern Cities, which is headquartered in Long Beach. “To say owners are reducing rents is a fair statement for Long Beach.”

On a side note, if you’re really interested in the multifamily market, from an investing or operating standpoint, rent reduction is expected to be one of the hot topics at this year’s 41st Annual Rental Housing Expo at the Long Beach Convention Center. The free event on Wednesday is expected to draw 2,000 attendees and 143 exhibitors. Visit apt-assoc.com for more information.

One factor driving down rents, even with a large number of foreclosure-bitten ex-homeowners entering the renters’ realm, is the lack of people who can be counted on to pay their rent, Ahlswede says, adding that apartment operators are experiencing higher than usual numbers terms of vacancies because they are “having a very hard time finding qualified people to rent to.”

Apartment owners or managers typically view a qualified tenant as someone who has at least two years at their present job. “When you’ve got 13% unemployment, that’s not so easy to do anymore,” Ahlswede says. Multifamily operators also don’t like to rent to anyone who has been involved in a foreclosure. “Now that’s a problem,” she adds. “I think you have some difficulties in the economy that’s starting to show up in rentals.”

It’s tough to give accurate average rent prices in Long beach due to the broad cross-financial spectrum that comprises the city’s demographic makeup, even within given ZIP codes. The Marcus & Millichap report shows that the average rent in Los Angeles County is $1,366 per month. Ahlswede estimates average rents in Long Beach are slightly lower, and about 25% below other ocean-side communities. The Marcus & Millichap report gives an average rent in Long Beach of $1,331.

Perhaps one of the biggest drags on rents is the amount of condominium stock coming back onto the market as apartments. Financing, particularly for any deals above $10 million, has slowed down sales and purchases of apartment complexes, and many of the deals that are happening are distressed sales where owners are in over their heads and have either given up the property to the bank or must sell quickly to avoid bankruptcy. “We are seeing a lot of sales of multifamily properties in the five- to 30-unit range, and a lot of them are distressed condo conversions,” says Sean Coon, who works out of Marcus & Millichap’s Downtown Long Beach office in the World Trade Center specializing in the multifamily sector. Coon and partner Kevin King have represented a great deal of multifamily sellers and buyers in and around the Long Beach area.

During the height of the homebuying craze, condo conversions ran rampant in Long Beach, with many 1980s era apartment buildings undergoing a change to for-sale condos. The switch requires several steps, including “mapping” the conversion for the record with the state, and gaining approval from the Long Beach Planning Department. So many conversions were happening a few years ago that the city’s chief planner actually issued a report on condo conversions, which shows a great number of them were occurring all over the city, particularly in Downtown Long Beach.

“The majority of those projects did not even get to the (first) stage of becoming condos,” Coon says. And of those that did, it’s now extremely difficult for sellers to dump them. “Today, the sellers can’t make sense of them as income properties,” Coon says.

One stunning example of a condo-conversion failure that has come back to the market as apartments is a 14-building portfolio, mostly apartment units around 10th Street and Cherry Avenue in Central Long Beach, which was taken over by the banks. Of those 14 properties that were purchased as apartments and slated for conversion to condos, only three were actually converted, and the other 11 projects have just sat vacant for the past year, Coon says.

There are also many multifamily properties listed for sale private investors who must get rid of them because “the current rents don’t support the debt that they have,” Coon says. One example is a 56-unit complex on Long Beach Boulevard south of the San Diego (405) Freeway that recently sold. “They were completely vacant and had been converted to condos, and now they are being rented out as apartments,” Coon says. Investors had purchased the apartments, and spent a great deal of money on renovations in hopes of selling the units for large chunks of cash each for a good return. All told, the investors spent about $15 million. And, Coon adds, “they ended up selling it for $8.2 million.”

To end on a high note, all the deals out there right now are beginning to pique the interest of sidelined investors seeking to take advantage of what some believe is the nearing bottom of the multifamily market.

“We’re seeing people starting to get back into investing,” Coon says. “I think people feel they can see an end to the down cycle, they feel that may be in the next six months to a year is probably the bottom.”

He adds: “There’s a lot of opportunity out there and I think people are catching wind of it.”


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5 Comments so far.
Blabber Mouth
The condos at Pine@Sixth Street are also an apartment to condo conversion and couldn't sell them to make a profit so they simply started leaving them out but the turn-around is aweful as tenants are always moving-in and moving-out. But no discounted rent as 2-bedrooms & 2-baths are going for $2,000 per month. Thanks...

Low rents
I don't know where the Marcus & Millichap report got $1,331 as the average rent, but it must be some sort of mathmatical number and not typical of real rent prices. They sure didn't look in the Gazette at the "for rent" ads. There are lots of regular one-bedroom apartments advertised in the $700 to $900 range. Their number must have included the prices of those new "luxury" and ocean front properties. I was looking in Redondo Beach and other beach towns but decided on renting in Long Beach because the prices here were so much cheaper, and the apartments so much nicer. Rents in Long Beach are even cheaper than in rent controlled LA and the apartments are in better shape. If you want a really good deal on the rent, move to Long Beach.

Devo
And these stories always end with something like 'the bottom is in sight... a few more months and it'll turn around'. People need to look beyond the "market" to the larger trend, oil depletion. We are in all likelihood now on the backside of "Hubbert's Peak". Meaning worldwide oil production will be declining over the next few decades until it is basically gone. The industrial revolution, mechanized farming, the global population explosion and the whole concept of a "growth" economy are based on the man-power multiplication factor of burning cheap oil. Rome did not "fall", it declined over centuries from a centralized organization to a decentralized amalgam of fiefdoms. That's where we are going, with less production and less population. It will be offset partially by a switch to renewable energy forms but the heyday of endless expansion is over. People should forget about investing in real estate and hoping that economic expansion will increase prices and give them a profit, that model is over. Invest in renewable energy, that's where the growth is.

It'scalledKarma, Beach!
When I moved here a few years ago, many businesses were being kicked out for new condos. The city used it's eminent domain to decide for the people of the city, what was better for us. We let them, we watched as they "built a better Long Beach." Never mind the families that grew up in apartments or businesses that were there. They were'nt great businesses and the apartments were modern and attractive, but they were there for years, they called these places 'home.' Then the City said we'll pay for them to get new homes, somewhere else, these be homes for the people we want, people with money. That will bring a better Long Beach. Now they're stuck with empty expensive condos. I wonder if all those millions of dollars couldn't have gone to retrofit existing buildings, making them better, creating a better Long Beach, or maybe fixing the main library, or improving trnsportation, or maybe, just maybe serving the people who's money it was and doing something that benefitted us all. Then again, I'm not expert, they are. - Elliot

paul b
I said it before, I'll say it again. Wake me up in May 2010, that's when the real bottom is in. If I'm still employed by then, I'll think about investing in rental property... .

Realty Bites
Reality Bites brings the wide world of business into focus through the lens of real estate.

Don Jergler's 12-year journalism career spans four daily newspapers, one magazine and a website. Between 2002 and 2008 he covered real estate, redevelopment, general business, tourism and downtown for the Long Beach Press-Telegram. For the past year he was Editor of Real Estate Southern California and edited and wrote for the popular commercial real estate news source globest.com.

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