Long Beach's Condo Conversions Haunt Rental Market

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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