Apartment buildings prove to be star performers.

Financing remains sticky but occupancy stays healthy

Although the market remains sluggish in some parts of town, apartment buildings are "by far" the best-performing income property in the Los Angeles area, say real estate professionals.

"They are the darling of the real estate industry," said Bruce Hanes, president of Hanes Co., a brokerage firm. "I've been a broker since 1964, in the business since 1962, so next year it will be 30 years, and there's never ever been a better time to buy (apartment buildings)."

This is especially true in western Los Angeles and Hollywood, where Hanes said apartment buildings are being advertised for about seven times their annual gross rental revenues. In real estate lingo, this figure is called the multiplier, and the standard multiplier is usually between 10 and 15.

Hanes expects the prices to fall another 5 to 7 percent in coming months and then bottom out.

"They will remain the darling of the real estate industry for the next two to three years," said Hanes. "Everyone needs a place to live, and there will be no new construction until 1994-95. The rents will go up."

Things aren't going quite as well as on the east side of town. Multipliers are running about 9 to 10 in the San Gabriel Valley and "prices are significantly inflated because there's no rent control," said Hanes. But apartment buildings still are the best income property, because every other type of property is doing worse.

"In terms of income property, apartments are probably faring better than anything else -- hotels, industrial, office property," said John Gordon, a partner in Fertig & Gordon Cos. Inc. in Pasadena, a real estate investment firm specializing in income properties.

Apartment buildings in the eastern part of the greater Los Angeles area are about 95 percent occupied, Gordon said. But rental rates have been flat for more than a year and probably will remain that way for another six months, making positive cash flow on a financed property difficult, and financing is difficult to obtain for either purchase or construction.

"Sales of apartment buildings are down 50 to 75 percent in the number of sales over the past year and a half. They're way, way down compared to two years ago. They are not selling. Prices are down about 5 to 10 percent; the price is not enticing enough," said Gordon. "It's hard to get money to buy apartments. The prices have been steadily softening for a year and a half. It's very hard to get construction financing for almost anything."

To obtain new financing, the buyer must have 30 to 40 percent of the purchase price down in cash, Gordon said, which is about the same percentage necessary to keep rental income ahead of payments and maintain a positive cash flow.

Existing loans with variable interest rates can be assumed for only 10 percent to 15 percent down, Hanes said.

On the west side, he said, apartment building cash flow compares with that of certificates of deposit and other standard investments "for the first time since 1976."

Gordon predicted that market will improve on the east side and rental rates will go up when the employment picture brightens.

"When people are out of work, people will move in with each other. Maybe four people will live in a two-bedroom apartment," said Gordon. "Most of these things are just temporary. Once employment goes up, more people will buy apartment buildings."

However, Gordon revised his prediction from last quarter that apartment construction would begin soon in the west San Gabriel Valley. Construction financing continues to be difficult to obtain. Economic pessimism, especially about real estate, is worsening and spreading, he said.

"For the first time," Gordon said, "people are gloomy about Southern California."