Investors return to apartment buildings market.

L.A. COUNTY - With the huge Southland economy sputtering to life, more investors are moving to stake claims on that workhorse of real estate investments, the apartment building.

Apartment building prices are down almost one-half in the 1990s, and interest rates are relatively low, meaning that multi-unit buildings have become cash machines for those who buy right.

And many experts say the bottom in apartment house prices has been reached, reducing the risk of capital losses. But there is less consensus on whether prices can rise.

The big backdrop: Can surging employment in Los Angeles County spark apartment occupancies and rents up, boosting property values?

And will people stop moving away from Los Angeles County, a domestic migration which has siphoned off nearly 1 million possible tenants in the last five years?

In the more bullish camp is Perky Apperson, broker with CB Commercial Real Estate Group Inc. in the San Gabriel Valley. To her, the financials of buying apartment houses today are compelling, and the supply and demand situation for them - foreclosures have been clogging the markets - is on the mend.

"Buyers are looking for 'cash on cash' returns, and they are finding them," said Apperson.

The expression "cash on cash" refers to the annual return on a down payment, after expenses such as mortgage payments and maintenance costs, but before taxes arid depreciation.

"We are seeing 10 percent cash on cash in better buildings and neighborhoods, and 20 or 30 or even 40 percent in bad neighborhoods," declared Apperson.

She noted, "In other markets, such as Dallas, or Phoenix, Colorado and Seattle ... they say that prices went down in steps, but when they went back up, it was like it hit a wall, and it goes straight up."

John Gordon, owning partner of real estate outfit Fertig & Gordon in Pasadena, also likes the market.

"We are starting to see the vacancies fill up, and that usually means higher rents," he said. "It's not so easy as it sounds, but it is a good market."

At the very least, prices are firming, confirmed John Karevoll, publisher of the Southern California Real Estate Observer in Running Springs.

"All you have to do is take a look at the figures (of median apartment values, per unit). It has leveled off at around $38,000 to $40,000 a unit," said Karevoll.

Another positive for those who own apartments now: Until very recently few were being built, meaning the supply is crimped.

"For apartments, the numbers are amazing," said Michael Bazdarich, president of the MB Economic consulting firm in La Canada. "In Los Angeles County, there were 53,000 units permitted (given permits for construction) in 1986. There were 3,000 permitted in 1995."

However, that dearth of multi-family housing construction now appears to be ending. In the first two months of 1996, 528 building permits were issued for multi-family housing in L.A. County, a 176-percent increase from the like period of 1995 (see related story on page 12A of this week's Quarterly Real Estate Special Report).

Apartment values - bottoming out?
(Values for apartment houses in L.A. County)

                Median price      Aver. price
Year              per unit        per sq. ft.

1996 (Feb.)        $37,500           $47.56
1995                39,061            50.56
1994                42,790            55.89
1993                53,228            67.51
1992                63,450            81.64
1991                64,482            83.25
1990                65,080            86.71

Source: Dataquick Information Systems, John Karevoll, editor of the
Southern California Real Estate Journal. Annual averages, except
for 1996, which is for the month of February.

Like others, Bazdarich points to growing employment in Los Angeles County as the big, key reality that will boost values of local property.

"In January and then February, we saw very strong employment growth," he said. "It looks like it (the number of jobs in the county) is up more than 2 percent from a year ago, and really taking off now."

Outmigration flattens
(L.A. County population figures)

        Estimated     Net domestic    Natural increase/
Year    population      migration    internal migration

1995     9,138,789       -217,860           223,039
1994     9,137,370       -228.237           239,125
1993     9,135,450       -208,051           270,772
1992     9,071,441       -163,288           273,760
1991     8,960,347       -177,026           255,808

Source: U.S. Census, for years ending July 1. Figures do not add up
exactly, due to the use of estimates. U.S. Census Bureau bases its
estimates on data gathered from many sources, including Internal
Revenue Service filings.

Perhaps sensing the improving outlook, some big players are already buying, and buying big: San Francisco-based apartment industry magnate John C. Atwater last year (through a partnership) bought the huge, 4,222-unit Park La Brea complex near the Miracle Mile section of Los Angeles, and property baron Donald T. Sterling, who has built a $1 billion fortune in apartments, bought the 193-unit Wilshire Estina complex, in Beverly Hills, late last year.

Not all believe the future is rosy for the Los Angeles business scene, and that continued economic restructuring is the Achilles heel for Southland property values, including apartments.

Some are wary

The new economy is again generating employment, but in lower-paying job categories, say some. For example, the fastest-growing manufacturing industry in Los Angeles County in January was apparel, which added 3,100 jobs to an existing base of 108,300. That spells a tepid market for landlords, say some.

"For apartments serving the higher-end market, things might go OK. But we are not seeing the kind of incomes or income-growth for the mass population that were once expected," said Goetz Wolff, professor of urban planning at UCLA. "Ordinary people are going to have less money for rent."

Los Angeles County through the post-war era enjoyed a strong migration from other parts of the United States. But that picture changed suddenly in the 1990s, during which nearly 1 million more people left Los Angeles for other parts of the country than entered.

The huge domestic outmigration all but offset the natural increase (births minus deaths) and flow of foreigners here.

The big switch has profound implications. Youngsters, for example, generally cannot rent apartments, and foreigners tend to be lower-income.

Data incomplete

"And I think people are still leaving; we just don't have the data," worried Gordon Pattison, vice president at Santa Ana-based Investors' Property Service, which manages roughly 100 apartment buildings. "This is a trend that has serious implications for property values. You gotta have people to rent apartments."

Contributing to the domestic outmigration is a general feeling that the quality of life in Los Angeles is not what it used to be, say some.

"Los Angeles has such a bad reputation, and most residents seem to believe that reputation," said Stan Plog, president of Plug Research Inc. in Reseda, a company which measures consumer attitudes. "They think of Los Angeles as crime-ridden, crowded, smoggy and in many ways oppressive."

Many in the apartment business say, not too surprisingly, that location still is key.

Certain markets have been depressed and remain so, while other markets are perking up.

"The beach cities (Manhattan, Hermosa and Redondo) are strong, West Los Angeles is strong, certain parts of the west San Fernando Valley are good, Downey is stable," said Greg Moyer, senior vice president and regional manager with Marcus & Millichap Real Estate Investment Brokerage Co. "Other areas are still struggling, such as South Central part of Los Angeles, Hollywood and Long Beach. I think in another year to 18 months you'll see those areas start to come up."