Apartments to remain investors' property of choice: quake to cause only temporary disruption, experts say.

Before the Northridge quake hit Jan. 17, several real estate investment experts had singled out San Fernando Valley apartment projects as the strongest target for 1994 income-property investment activity. And according to many of them, the 6.6-magnitude earthquake hasn't necessarily altered that conclusion -- even though sales will necessarily be disrupted and some owners might relinquish damaged properties to their lenders during the next few months. According to a 1994 L.A. County forecast report by commercial brokerage firm Grubb & Ellis Co., investors will show the greatest level of interest in apartment and industrial properties.

Bob Bach, director of research for the firm and author of the report, noted that pending investment sales have been delayed in the quake's wake while property inspections proceed. "But I don't think the earthquake will have a long-term impact on investment activity; people who buy investment properties here are in for the longer-term, they understand that this is part of life in Southern California."

Bach predicted the amount of money invested in L.A. County apartments would increase 10 percent in 1994, compared with 1993. That would mark a dramatic improvement from last year, when the amount invested in local apartments dropped 9 percent from the prior year.

He predicted the amount of money invested in local industrial real estate is expected to grow 5 percent or so in 1994. That also represents a dramatic turnaround from the 19 percent drop in the amount of money invested in local industrial real estate last year.

According to Bach's report, apartments accounted for 40 percent of all dollars invested in Los Angeles Basin real estate in 1993. He attributed the popularity of these top-scoring investments to the area's strong population growth, the bottoming out of commercial vacancy rates, and lack of substantial additions to supply.

The earthquake's short-term disruptions notwithstanding, he said, "the greatest demand (for apartment buildings) is probably up there in the San Fernando Valley and parts of the San Gabriel Valley."

Bach further said he believes the San Fernando Valley is perceived to be a strong residential area across the board, while the San Gabriel Valley's strength lies in its Asian-American communities.

Sale prices of apartment buildings, however, should continue to ease off another 10 percent, on average, according to Bach.

Martin Morgenstern, Southern California regional manager of investment properties for commercial real estate brokerage CB Commercial Real Estate Group Inc., said apartment sales also top his list of commercial real estate investment opportunities for 1994.

According to his estimates, multi-family housing made up about 30 to 40 percent of his firm's total L.A. County commercial property sales, in terms of number of transactions, during 1993. It's a trend that he predicted would continue in 1994.

Morgenstern also said he foresees a continued uptick in office facilities purchases by user-investors who, he said, tend to occupy about 20 percent of the available space and lease the rest to other occupants.

As for industrial properties, Morgenstern said he sees a large demand for high-quality properties, but the supply of such properties are sparse.

In terms of location, Morgenstern said multi-family housing "sells all over the county." But the hotbed for office facilities sales, he said, will continue to be West L.A.

Other observers were not as sanguine as Morgenstern in their outlook.

"It's not a good time to be an owner of property," said Jay Haskell, president of The Seeley Co. But, picking the best of the county's options, Haskell said, he, too, would go with apartments. "Apartments are 'hot' because they continue to run at higher occupancy levels than office, industrial or retail properties," he conceded.

And where to buy? Despite quake-related disruptions lasting three to six months, Haskell remains bullish on "the San Fernando Valley -- specifically the Burbank market, which is driven by continued strength in the entertainment industry." Property age may be a factor, as "many of the buildings suffering the most damage were 1950s vintage, so investors would want to look at that," he added. Apartment buildings were also the No. 1 "hot" category for Marcus & Millichap Real Estate Investment Brokerage Co. Inc., according to John Kerin, regional manager of that firm's downtown L.A. office.

In 1993, the firm closed more than 300 local apartment building transactions, accounting for about $325 million in gross sales. Apartment building sales will probably dominate total sales activity during the first six months of 1994, Kerin told the Business Journal, the same way that category dominated the last six months of 1993. The big difference, he said, will be price.

"I think the prices have hit bottom," he reasoned, because "the inventory of REOs will shrink throughout 1994."

REOs are foreclosed properties taken back by lenders. Properties sold by the lending institutions that repossessed them made up the bulk of sellers in 1993. "Most properties were sold with 20 percent down payments," said Kerin, at prices that had "probably dropped 40 to 50 percent from where they were in 1989." Kerin said he foresees the hottest local areas for apartment building sales as being the San Fernando Valley (particularly Panorama City, Sepulveda and Van Nuys), the Hollywood and Mid-Wilshire areas, and the city of Long Beach. In other words, he said, areas that have suffered major job losses -- enough to make current owners nervous.

"It's all a matter of perception," said Kerin. "Properties in these areas have been sold at prices low enough to entice investors."

"Prices there have gone down about 50 percent from 1990," he noted, despite the fact that rents have not dropped anywhere near that much.

Kerin added that he doesn't expect to see pricing altered dramatically as a result of the earthquake. But he fears it may lead to additional saturation of the market with REOs, as some owners "may just turn buildings back in to the bank at this point."

Mike Zugsmith, chairman of Encino-based Zugsmith-Thind Inc., the sixth-largest commercial real estate brokerage in the county, said he also believes residential income properties will continue to be hot in 1994. But he believes that will be so because REO properties will continue to pour onto the market.

Unlike his competitor at Marcus & Millichap, Zugsmith said he does not see REO inventories dropping off any time soon. "Inventory of lender-owned properties will continue to hang over well into 1995, if not further," he concluded. That warning goes double for prices, he added. "We don't see prices increasing," said Zugsmith, "because we don't see rental income increasing."