Multifamily Construction Rebounds

A recent LA Times article reported that multifamily construction rose to the fastest pace in six years.  Indeed, my observation is that builders are building  the most for rent multifamily units since the late 1980s.  There are many reasons cited in the below article why this surge will not result in an oversupply over the next year or two.  However, if the trend continues, some caution must eventually be applied to an ever surging supply. Even the 2013 USC Casden Multifamily Forecast warned that an ever increasing supply could eventually lead to lower rents and a rising vacancy rate.   Usually, such overbuilding  manifests itself in rent reductions during recessions and results in steeper decreases than otherwise. In the past, at some later stage in the cycle, developers switch from rental to condominiums and thereby reduce the supply of newly constructed rentals in Los Angeles.

In the short terms, rents continue to rise in Los Angeles and vacancies decline  as the economy improves.    You can read the LA  Times article below:

Apartment construction surges across the Southland amid rising rents – Los Angeles Times.

At the recent Bisnow Multifamily Conference, many pundits debated what inning we were in.  In other words, how many years will the rents rise and vacancies decline before rent fall and vacancies rise.  I find it very difficult to predict what inning we are in. However, we can conclude that rentals properties are not inexpensive per square foot on a historical basis.  Value plays usually occurs in the very early stage of recovery or late stage of the decline.  So from this, we can conclude we are not in the very early stage of  this positive cycle.

Here are some takeaways from Bisnow’s SoCal Multifamily Conference on May 22, 2014

1.  Shower Only:  50 to 75% of the tenants will accept shower only units.

2.  Internet Speed:  Millennials are very concerned with the speed of the available internet service.

3.  Online:  Millennials prefer to do as much on line as possible:  pay, process work orders, and rent.

4.  Work:  Many Millennials are working either part time or full time at home.  They like internet cafes,  conference rooms, and  offices to use or rent within the apartment complex.  The lines between live and work are blurring.

5.  Core 24/7 urban cap rates are sub 4%, and developers are building to 6% cap rates on un-trended rents.

Office Rents and Concession Rise Since 2010

In most other types of real estate, when the market recovers, rents go up and concessions go down.  However,  this office market  may be different. This Compstak chart compares  WLA office market rents and concessions in 2010 and 2014.  Rents have risen but so have average tis and free rent.  As on explanation, many investment companies are pushing now to get higher contract rates by maintaining or even increasing tenant improvement and free rent.  These companies can then achieve higher appraisal values, refinancing proceeds, or sales prices.

In late 2008,  with SOMA on the dive, we  leased only to start-ups on short term leases with nothing but first round capital in our 410 Townsend building in San Francisco.  Almost every company in the building achieved success.  Zendesk is another one of those original tenants. Zendesk just went IPO on the NYS.  The story the building as a start-up cluster was featured in the Wall Street Journal in 2010.   Congratulations Zendesk.  The article about the IPO is below.

Zendesk stock soars 49 percent on first trading day – San Francisco Business Times.

Street Performer at The Third Street Promenade

People perceived Westwood Village as a distressed retail area because it has been overshadowed by the Third Street Promenade and other retail areas of the City.  As a resident, I have been delighted with the increase in local retail opportunities in the Village , including Target, Ralphs, Trader Joes, Whole Foods, CVS Drugs, and Rite Aid.  Yes, Westwood Village no longer has the weekend foot traffic or tourist draw it had in the 1980s.

I will offer one suggestion here.  The Third Street Promenade offers a number of street performers about every 100 feet.  One can go to the Promenade and experience free entertainment from singers to jugglers.  I would suggest that Westwood Village try a similar tactic on weekends.  Last week, I saw a musical group outside Starbucks next to the Village Theatre.  A large group gathered around and filled Starbuck’s outdoor seating.  It gave a verve to the area.

Here is some information on how Santa Monica regulates this entertainment:

http://suebasko.blogspot.com/2011/03/santa-monica-3rd-street-promenade.html

Class C Office Building in Echo Park Converted to Residential

Vacant Interior of Office Building

Here is an example of a completed 1971 office building in Echo Park Los Angeles vacant since 1994.  Linear City Development purchased the building in 2011 and recently completed renovation of the building into 96 residential loft like units. Here is the building after renovation as the ElysianLA:

Some of the older conventional office buildings may be candidates for conversion to residential..  The  City may need to relax setbacks in some cases like the City did for Adaptive Reuse Downtown.  Here is one example of such a conversion proposed  in North Hollywood:

Building Los Angeles: Studio City Office Building Going Residential.

Office landlords want Tenants to use their tenant improvement allowances for fixed improvements that may have a residual value.  Tenants are reducing the number of enclosed offices and in turn , this lowers tenant improvement costs.  Instead, tenants want to use the savings to purchase their furniture and cabling systems.  Indeed, in open offices, furniture is becoming  a more important determinant of the office layout.  Unfortunately for the landlord, furniture is even less likely to have any residual value.

Location to Popular Bars Becomes a Factor for Young Renters When Deciding Where to Live

We received notice from an apartment tenant this week that the tenant is moving to be closer to bars.  Walkability has become a buzz word in the multifamily arena.  As younger renters become educated about the dangers of drinking and driving and enforcement tightens, young renters are seeking strategies to commute to bars to socialize. Renters who reside close to restaurants and bars can walk home. How to drink safely now becomes a factor in the desirability of an urban multifamily location. Cheers.

Rendering of the Great Room in the New Highrise Apartments At  Wilshire and Vermont

Most brand new apartment units in Los Angles do not have separate or partitioned kitchens, especially in those developments appealing to Millennials.  Instead, there is one great room for living, eating, and food preparation.  The kitchen is separated from the dining or living area only by a breakfast bar.  I guess dirty dished are no longer unfashionable.  Soon the partitioned kitchen, separated from the dining or living area by a cabinet or wall will look passe.