After holding back their dollars after the market crashed, banks and investors have started to throw their money at apartments in the San Fernando Valley region. They’re betting the multifamily market is a safer niche than the office or retail sectors that remain constrained by anemic job growth. The cash dump into apartments has raised the prospect of future overbuilding and can be seen throughout the Valley as investors and developers scoop up apartment projects or former office and industrial spaces with visions to erect luxury units. “If you have money to lend or are an equity investor, it makes little sense to look at new office construction or industrial construction,” said Patrick Simons, principal and founder of Strategic Property Economics, a nationwide market researcher and real estate adviser. With job growth low and a still too high vacancy in other sectors, investment is moving from the sidelines or other commercial classes toward multifamily, Simons said. Some of the projects planned just in Warner Center include a nearly 300-unit luxury complex on Eton Avenue by Wood Partners, a 244-unit on De Soto Avenue by developer TDI, and a 340-unit hillside luxury project by Sares-Regis Group nearby Warner Center on Ventura Boulevard . The TDI project will open its first units in May 2012, while the other projects will begin opening the first apartments in 2013. Developers say the cards are stacked in their favor for years to come. Tight lending restrictions are holding back single-family home purchases, population growth is expected to boom, and more and more individuals are choosing an urban lifestyle with shorter commutes than a suburban tract home, experts say. A healthy population of 20- to 34-year-olds that typically rent is also pushing up demand. “I think the days of everyone getting older and buying a big house with a white picket fence and all of that are probably numbered,” said Todd Pratt, executive vice president of Burbank-based developer Chandler Pratt & Partners. Chandler Pratt expects to break ground early next year on a 156-unit apartment project with ground-floor retail on Lankershim Boulevard in North Hollywood. The area is home to lofts and luxury units near the neighborhood’s subway stop and Orange Line station. The project, which has secured financing, is expected to open in spring 2014, a timeframe Pratt said will allow the luxury units to attract pent-up rental demand. “This thing has been in park for a couple of years…but it looks like we should hopefully get this thing off the ground early next year,” he said. The company also plans to be in escrow on about five pieces of land in the San Fernando Valley in the next 90 days for market-rate and affordable apartments, Pratt said, declining to be more specific. Multifamily development ‘white hot’ Equity funds are also playing a big role in development in the area. Last month, IMT Capital LLC used a new $350 million investment fund to purchase the majority of the former Northridge Hospital Medical Center on Sherman Way. Investors in the committed equity fund include college endowments, foundations and pension funds — investors that typically look for stable places to park their dollars. IMT plans to demolish the complex in Van Nuys and replace it with luxury town homes and apartments. Units are expected to open for leasing in about three years, IMT said. “The institutional market (for multifamily) is incredibly hot right now — it’s white hot,” said Vince Norris, partner at Hendricks & Partners, an apartment sales and research firm. “The institutional money thinks there is opportunity for future rent growth so they get in now.” The multifamily market has recovered faster than other areas of the commercial market. And access to financing — although harder than the boom years — is easier than for office or retail properties, which have been held back as job growth sputters. During the first quarter investors plopped down 40 percent more dollars nationwide for multifamily apartments than the same period in 2010, according to data from the CoStar Group. Los Angeles and Washington D.C had the highest sales volume at $900 million, the researcher said. Banks have also begun to let loose dollars for apartment acquisition and construction loans, industry observers say. “The banks want to hedge their risk and see apartments as being their ticket to less risky and safer investments,” said Warren Berzack, a principal of The Berzack Group and Lee & Associates-LA North/Ventura, who recently closed three deals for smaller multifamily apartments in the San Fernando Valley. Construction loans, Berzack said, began to loosen about six months ago, while acquisition lending eased about 10 to 12 months ago. Multifamily construction And new construction will also start ramping up. During the first nine months this year, developers pulled permits for 4,175 multifamily units in the city of Los Angeles — up 54 percent from last year, according to the Construction Industry Research Board. As of 2010, the value of building permits for new office, retail and similar properties has fallen every year since 2007, while new industrial permit value has fallen every year since 2005, according to the researcher. After a period of little new supply — as developers shelved projects during the downturn — developers are ramping up their plans for new construction, hoping to open the new units around 2013 or 2014 “It’s not yet a construction boom, but it is an entitlement and planning boom,” Simons said. Simons said he is “cautiously optimistic” renters will appear for the new projects, although if job growth falls off, some markets—such as apartment heavy Warner Center—could get hit. “If it all gets delivered and we don’t have the job growth to support it …then we will be in an oversupply situation,” he said. But with job growth low, there is even less demand for new office or retail spaces, especially in the office sector where vacancy is highest. Office vacancy rates in the greater San Fernando Valley sat at 17.5 percent at the end of the third quarter. Asking rents for class A space have dipped 7 cents to $2.22 per square foot compared with the third quarter last year, according to Jones Lang LaSalle. Comparatively, multifamily is booming. The average vacancy rate in the greater Valley was 5.5 percent in the second quarter, the lowest level in more than two years, according to Hendricks & Partners. Average rents also rose to $1,431 in June, up nearly 2 percent over a 12-month period. Developer Wood Partners is one of those that recently broke ground. The company in August kicked off the start of a 298-unit luxury apartment complex in Warner Center dubbed Warner Park. The firm envisions the first units ready for leasing in early 2013. The final product will be decked out with a fitness center, a resort-style pool and universal wireless Internet. Brian Hansen, Wood Partners’ director of development for Southern California, said financing has eased, but is still not amazing by historic standards. “It has become slightly easier,” he said. “Two years ago it was extremely hard.” Wood Partners expects its project to hit the market at just the right time, after supply from 2007 to 2010 is leased. From 2013 to 2015 about 1,000 new units are expected to open for leasing in and around Warner Center, said Norris of Hendricks & Partners. But the economic recovery is stalling, causing investment for office and retail — more dependent on job growth — to grow riskier, while raising questions on whether the demand for more apartment units exists. UCLA Anderson Forecast said in September one of the main reasons the economy won’t fall back into recession is that industries such as housing, consumer durables and inventories can’t fall much further. Anderson forecasted the unemployment rate to hover around 11 percent in California through 2013, with job growth of only 0.7 percent in 2012 and 2.1 percent in 2013. But Norris said population and some job growth will fill the units and a long, cumbersome entitlement process will serve as a check on a flood of luxury units. Overbuilding is “a worry, not a concern,” he said.
Commercial Market in Limbo Prompts Multifamily Activity
