Comment
Rate
Rental Reduction
 |
| David Gray, the architect and developer of the Judson building at 424 S. Broadway, is one of the apartment building owners facing increased competition, as more than a dozen rental structures are expected to hit the market this year. Photo by Gary Leonard. |
With Rising Inventory and Flattening Rates, the Downtown Apartment Market Faces a Challenge
by Anna Scott
This month, the first residents began moving into the recently renovated Mandel Lofts, a four-story, burnished brick edifice wrapping around the corner of Seventh and Olive streets. Half a mile away on Broadway, the Judson C. Rives building waits in anticipation, the first tenants for its 60 units expected within weeks. Meanwhile, overlooking Pershing Square, the Title Guarantee building was slated to begin move-ins for its 74 apartments last week.
These are just three of the approximately 10 long-planned rental buildings slated to open Downtown this year. But as the developers get set to debut their multi-million dollar apartment complexes, they are suddenly encountering more competition than many expected.
The Downtown Los Angeles rental market has hit a storm that, if not perfect, is certainly jarring to many. Along with the expected slate of apartments, would-be renters now enjoy a wider choice from condominium developers suddenly fearful of being able to sell units for $400,000 or more during a credit crunch. Then comes a slew of other units created by a "shadow market," as investors who purchased condominiums several years ago strive mightily to rent them out.
In short, supply seems to have finally caught up with demand in Downtown's rental market. The trend, say experts, is likely to continue.
"Downtown two years ago was one of the tightest markets around," said Dolores Conway, director of USC's Casden Real Estate Economics Forecast. "You could find something to buy, but not to rent, because of the huge housing boom. Then the market changed. We have seen a steady decline in occupancy in 2007."
The dip has been largely spurred by the subprime mortgage crisis, which has thrown the entire housing market into a tailspin. That, combined with the fact that Downtown rents have risen in recent years, has prompted some developers to turn their condominium efforts into rentals in the effort to keep the cash flowing. The speculation is that many will seek to ride out the storm and, when the market rebounds, convert the apartments to condos.
Staying competitive amid the growing number of rental units poses a challenge to Downtown developers. Experts say those looking for apartments in the community will likely see rents flatten or even drop over the next year.
"There's a lot of choice Downtown," said David Kean, a broker with Prudential California Realty who represents properties Downtown and on the Westside. "People are going to have to step up to the plate and offer more amenities, offer a month's free rent. I think there will be a glut - but there already is a glut."
A Crowded Landscape
With the opening of new restaurants and nightspots, Ralphs supermarket and the Nokia Theatre, demand for Downtown housing steadily grew in recent years. Along with the oft-reported soaring condo sales, developers were enjoying a tight rental market.
Rents in the area encompassing Downtown and neighborhoods east to the 5 Freeway, west to Hoover Street and south to Washington Boulevard currently average approximately $2,068 for a two-bedroom apartment, or $2.08 per square foot, said Conway.
The Downtown core has been on the higher end of the scale. The Related Cos.' Hikari apartment complex in Little Tokyo opened in late 2006 with many units going for more than $3 per square foot - or nearly $3,000 for a two-bedroom residence. At the recently opened Orsini II in City West, two-bedroom units start at $2,200.
Soon, renters could find themselves with a lot more choice. Upcoming rental projects that were previously planned as condominiums include two buildings by SB Lofts developer Barry Shy with a total of more than 400 units, both expected to open within a year; the Amidi Real Estate Group's $50 million, adaptive reuse high-rise Ten Ten Wilshire in City West, opening next month and bringing 227 units available for short- or long-term lease; and the 118-unit Arts District building Artisan on Second from Trammell Crow Residential, scheduled to open by the end of this month.
"The market always helps to dictate" whether a project will debut as rental or condominium units, said Michael Bustamante, a spokesman for Meruelo Maddux Properties, developer of the 92-unit rental building Union Lofts in the Jewelry District, to open imminently. "We built our project with flexibility in mind so we'd be able to adapt to market conditions, and that's what we've done." Between October 2006 and September 2007, 1,300 rental units came online in the Downtown area, said Conway. In approximately the same period, occupancy dropped from 97.8% to 96%.
Although that does not sound like a steep fall, in rental terms the change is significant, Conway said. Previously one of L.A.'s tightest markets, Downtown now has a higher vacancy rate than Hollywood, the South Bay and the San Gabriel and San Fernando valleys.
Condominiums put on the rental market by investors who bought hoping to resell the units in the near future for a hefty profit have further diluted the rental market.
"We don't really have a way of measuring that, but we do know it's occurring," said Conway. "What it's doing is contributing a shadow supply to the market."
Christiano Sampaio, a broker who represents approximately 100 loft owner-landlords, mostly Downtown, said he sees an increasing number of renters leasing condos. "A lot of people would like a condo, but can't afford to get a loan, so people are starting to lease more and more," he said.
Condominiums available for lease last week on craigslist.com included units at the Packard Lofts near Staples Center, the Toy Factory Lofts in the Arts District, Market Lofts above Ralphs on Ninth Street, Elleven in South Park and the Eastern Columbia Building on Broadway. Including studio, one- and two-bedroom units, prices started as low as $1.60 per square foot and averaged just over $2 per square foot.
While for-sale buildings like the Eastern Columbia have in the past garnered some of Downtown's highest rents, local realtor R.J. Kas says he has seen rates plummet in this and similar buildings in recent months.
"Once you're competing against the developer, once you decide to rent it out, you're fighting an uphill battle," said Kas. "All of these units that could be renting for, say, $4,500 a month when you compare the square footage to the rest of Downtown, they're going for maybe $2,800."
At the same time, some Downtown condos still fetch rents well above the area average, said Sampaio. In the for-lease condo market, "The rents are all over the map," he said.
Holding Steady
Faced with a saturated rental market and the wild card of for-lease condominiums, some developers plan to lower prices in their upcoming projects.
"We've anticipated this all along," said David Gray of 424 Broadway LLP. The developer and architect of the soon-to-open Judson building, as well as several other projects, added, "Everyone knew that there was a problem in the residential real estate market."
Others say that despite the increased supply, the appetite for Downtown living remains strong enough to support current - if not increased - rents.
"I think there's a tremendous demand Downtown," said Kim Paperin, a managing director at Trammell Crow Residential. Rents at the company's Artisan on Second start at $2,000 for a one-bedroom apartment. "I think we're all going to do well."
Of the company's decision to shift from for-sale to rental units about a year ago, once construction had begun, she said, "The housing market certainly did have something to do with it, but we also saw a strong demand for rental housing."
Owners of existing rental buildings also say that they have not felt pressure to drop prices.
"Things are getting competitive, but between all my buildings I'm very satisfied," said Izek Shomof, who owns the Milano Lofts on Sixth Street and Grand Avenue, along with several buildings on Spring Street. Occupancy at his buildings ranges from about 97% to 100%, he said, and he has increased rents for some units in the past year.
Conway predicts that while the growth of Downtown's rental market will continue at a similar pace through 2008, rents will likely stabilize.
"Because we have a weaker economy, landlords will not have the strong demand that will allow them to raise the rents substantially," she said. At the same time, "the area's still very desirable to live in. Our best estimate is that rents will be close to what they are."
However, she added, the job market adds a layer of unpredictability. If unemployment ticks up, then demand will soften for everything.
One trend Conway expects to intensify in the next year is developers putting projects on hold as they wait to see how the housing market pans out.
Yuval Bar-Zemer of Linear City, developer of the Toy Factory and Biscuit Company lofts in the Arts District, agreed. His next project, a condominium complex called the Mill Street Lofts, was expected to break ground early this year but has been delayed for at least nine months because of the current housing market. He has not considered converting the project to rentals, he said.
"The cost of construction is so high, it's very hard to make the numbers work," said Bar-Zemer. "I think most of the projects that convert to rental have already broken ground; they can't stop the process and they decided to fill the time gap in the slow market."
Conway said she expects to see a full recovery in Downtown's housing market in three to five years, both in the for-sale and rental sectors.
"Downtown is still vibrant," she said. "L.A. Live will be coming online soon; there's the Nokia Theatre, Disney Hall, the Cathedral. There is a large demographic trend of young professionals and some retired Baby Boomers. Long term, I actually think things are going to be fine.
"But," she added, "it's hard to predict what's happening, because everything is in flux."
Contact Anna Scott at anna@downtownnews.com.
page 1, 2/25/2008
© Los Angeles Downtown News. Reprinting items retrieved from the archives are for personal use only. They may not be reproduced or retransmitted without permission of the Los Angeles Downtown News. If you would like to re-distribute anything from the Los Angeles Downtown News Archives, please call our permissions department at (213) 481-1448.
These are just three of the approximately 10 long-planned rental buildings slated to open Downtown this year. But as the developers get set to debut their multi-million dollar apartment complexes, they are suddenly encountering more competition than many expected.
The Downtown Los Angeles rental market has hit a storm that, if not perfect, is certainly jarring to many. Along with the expected slate of apartments, would-be renters now enjoy a wider choice from condominium developers suddenly fearful of being able to sell units for $400,000 or more during a credit crunch. Then comes a slew of other units created by a "shadow market," as investors who purchased condominiums several years ago strive mightily to rent them out.
In short, supply seems to have finally caught up with demand in Downtown's rental market. The trend, say experts, is likely to continue.
"Downtown two years ago was one of the tightest markets around," said Dolores Conway, director of USC's Casden Real Estate Economics Forecast. "You could find something to buy, but not to rent, because of the huge housing boom. Then the market changed. We have seen a steady decline in occupancy in 2007."
The dip has been largely spurred by the subprime mortgage crisis, which has thrown the entire housing market into a tailspin. That, combined with the fact that Downtown rents have risen in recent years, has prompted some developers to turn their condominium efforts into rentals in the effort to keep the cash flowing. The speculation is that many will seek to ride out the storm and, when the market rebounds, convert the apartments to condos.
Staying competitive amid the growing number of rental units poses a challenge to Downtown developers. Experts say those looking for apartments in the community will likely see rents flatten or even drop over the next year.
"There's a lot of choice Downtown," said David Kean, a broker with Prudential California Realty who represents properties Downtown and on the Westside. "People are going to have to step up to the plate and offer more amenities, offer a month's free rent. I think there will be a glut - but there already is a glut."
With the opening of new restaurants and nightspots, Ralphs supermarket and the Nokia Theatre, demand for Downtown housing steadily grew in recent years. Along with the oft-reported soaring condo sales, developers were enjoying a tight rental market.
Rents in the area encompassing Downtown and neighborhoods east to the 5 Freeway, west to Hoover Street and south to Washington Boulevard currently average approximately $2,068 for a two-bedroom apartment, or $2.08 per square foot, said Conway.
The Downtown core has been on the higher end of the scale. The Related Cos.' Hikari apartment complex in Little Tokyo opened in late 2006 with many units going for more than $3 per square foot - or nearly $3,000 for a two-bedroom residence. At the recently opened Orsini II in City West, two-bedroom units start at $2,200.
Soon, renters could find themselves with a lot more choice. Upcoming rental projects that were previously planned as condominiums include two buildings by SB Lofts developer Barry Shy with a total of more than 400 units, both expected to open within a year; the Amidi Real Estate Group's $50 million, adaptive reuse high-rise Ten Ten Wilshire in City West, opening next month and bringing 227 units available for short- or long-term lease; and the 118-unit Arts District building Artisan on Second from Trammell Crow Residential, scheduled to open by the end of this month.
"The market always helps to dictate" whether a project will debut as rental or condominium units, said Michael Bustamante, a spokesman for Meruelo Maddux Properties, developer of the 92-unit rental building Union Lofts in the Jewelry District, to open imminently. "We built our project with flexibility in mind so we'd be able to adapt to market conditions, and that's what we've done." Between October 2006 and September 2007, 1,300 rental units came online in the Downtown area, said Conway. In approximately the same period, occupancy dropped from 97.8% to 96%.
Although that does not sound like a steep fall, in rental terms the change is significant, Conway said. Previously one of L.A.'s tightest markets, Downtown now has a higher vacancy rate than Hollywood, the South Bay and the San Gabriel and San Fernando valleys.
Condominiums put on the rental market by investors who bought hoping to resell the units in the near future for a hefty profit have further diluted the rental market.
"We don't really have a way of measuring that, but we do know it's occurring," said Conway. "What it's doing is contributing a shadow supply to the market."
Christiano Sampaio, a broker who represents approximately 100 loft owner-landlords, mostly Downtown, said he sees an increasing number of renters leasing condos. "A lot of people would like a condo, but can't afford to get a loan, so people are starting to lease more and more," he said.
Condominiums available for lease last week on craigslist.com included units at the Packard Lofts near Staples Center, the Toy Factory Lofts in the Arts District, Market Lofts above Ralphs on Ninth Street, Elleven in South Park and the Eastern Columbia Building on Broadway. Including studio, one- and two-bedroom units, prices started as low as $1.60 per square foot and averaged just over $2 per square foot.
While for-sale buildings like the Eastern Columbia have in the past garnered some of Downtown's highest rents, local realtor R.J. Kas says he has seen rates plummet in this and similar buildings in recent months.
"Once you're competing against the developer, once you decide to rent it out, you're fighting an uphill battle," said Kas. "All of these units that could be renting for, say, $4,500 a month when you compare the square footage to the rest of Downtown, they're going for maybe $2,800."
At the same time, some Downtown condos still fetch rents well above the area average, said Sampaio. In the for-lease condo market, "The rents are all over the map," he said.
Faced with a saturated rental market and the wild card of for-lease condominiums, some developers plan to lower prices in their upcoming projects.
"We've anticipated this all along," said David Gray of 424 Broadway LLP. The developer and architect of the soon-to-open Judson building, as well as several other projects, added, "Everyone knew that there was a problem in the residential real estate market."
Others say that despite the increased supply, the appetite for Downtown living remains strong enough to support current - if not increased - rents.
"I think there's a tremendous demand Downtown," said Kim Paperin, a managing director at Trammell Crow Residential. Rents at the company's Artisan on Second start at $2,000 for a one-bedroom apartment. "I think we're all going to do well."
Of the company's decision to shift from for-sale to rental units about a year ago, once construction had begun, she said, "The housing market certainly did have something to do with it, but we also saw a strong demand for rental housing."
Owners of existing rental buildings also say that they have not felt pressure to drop prices.
"Things are getting competitive, but between all my buildings I'm very satisfied," said Izek Shomof, who owns the Milano Lofts on Sixth Street and Grand Avenue, along with several buildings on Spring Street. Occupancy at his buildings ranges from about 97% to 100%, he said, and he has increased rents for some units in the past year.
Conway predicts that while the growth of Downtown's rental market will continue at a similar pace through 2008, rents will likely stabilize.
"Because we have a weaker economy, landlords will not have the strong demand that will allow them to raise the rents substantially," she said. At the same time, "the area's still very desirable to live in. Our best estimate is that rents will be close to what they are."
However, she added, the job market adds a layer of unpredictability. If unemployment ticks up, then demand will soften for everything.
One trend Conway expects to intensify in the next year is developers putting projects on hold as they wait to see how the housing market pans out.
Yuval Bar-Zemer of Linear City, developer of the Toy Factory and Biscuit Company lofts in the Arts District, agreed. His next project, a condominium complex called the Mill Street Lofts, was expected to break ground early this year but has been delayed for at least nine months because of the current housing market. He has not considered converting the project to rentals, he said.
"The cost of construction is so high, it's very hard to make the numbers work," said Bar-Zemer. "I think most of the projects that convert to rental have already broken ground; they can't stop the process and they decided to fill the time gap in the slow market."
Conway said she expects to see a full recovery in Downtown's housing market in three to five years, both in the for-sale and rental sectors.
"Downtown is still vibrant," she said. "L.A. Live will be coming online soon; there's the Nokia Theatre, Disney Hall, the Cathedral. There is a large demographic trend of young professionals and some retired Baby Boomers. Long term, I actually think things are going to be fine.
"But," she added, "it's hard to predict what's happening, because everything is in flux."
Contact Anna Scott at anna@downtownnews.com.
page 1, 2/25/2008
© Los Angeles Downtown News. Reprinting items retrieved from the archives are for personal use only. They may not be reproduced or retransmitted without permission of the Los Angeles Downtown News. If you would like to re-distribute anything from the Los Angeles Downtown News Archives, please call our permissions department at (213) 481-1448.
 |
||
| Audit Criticizes Quimby Program |
Article Rating
Reader Comments
The following are comments from the readers. In no way do they represent the view of ladowntownnews.com.
You must register with a valid email to post comments. Only your Member ID will be posted with the comments.
Registered users sign in here: |
Become a Registered User |
Popular Searches
