San Fernando Valley apartment market to suffer 'one-two punch.'(Special Report: Real Estate)

Nearly 18 months after the Northridge temblor of January 1994, the San Fernando Valley apartment market is about to be slammed once again.

This time the punishment will be delivered via a one-two punch of repaired buildings coming back on line and federal rent vouchers expiring. The return of quake-damaged buildings to the market will increase the supply of available units, and the expiration of vouchers will reduce the supply of qualified renters, industry sources pointed out.

The upcoming double whammy will likely result in a growing rate of foreclosures in the areas hardest hit by the earthquake, which include Northridge, Sherman Oaks, Reseda and Van Nuys, sources said.

Todd Schwartz, a senior associate at Hanes Investment Realty Inc., a real estate brokerage in Westlake Village, explained that tens of thousands of 18-month rent vouchers handed out by the Federal Emergency Management Administration will begin to expire over the next two months. Those vouchers were given to financially strapped tenants in the months after the earthquake.

As a result, he said, there will be a "tremendous increase" in the number of eviction notices being issued to San Fernando Valley apartment dwellers, which is expected to lead to higher vacancies.

Craig Stevens, a principal and executive vice president at the Sherman Oaks office of commercial real estate firm Lee & Associates, agreed that the end of rent vouchers may cause vacancy rates for multi-family dwellings to rise in the near future.

Vouchers to vanish

He said apartment buildings in the central and northern valley communities of Northridge, Reseda, Granada Hills and northern Van Nuys - which suffered considerable earthquake damage - would likely again be hit harder than other areas. His reasoning: Buildings in many of those communities contain a higher percentage of low-income families, which are typically the biggest users of rent vouchers.

While the end of rent vouchers may deal a blow to the central and northern valley apartment sectors, the return of repaired earthquake-damaged apartments to the market could be equally harmful to valley apartment owners. Industry sources estimated that only 20 to 33 percent of quake-damaged apartment buildings in the San Fernando Valley have been repaired and put back on the market.

"When the rest of the buildings come back, contractors that paid only $10,000 to $18,000 per unit for damaged buildings will be able to undermine rents on other apartments in the area," said Stevens. He pointed out that any downward pressure on rents would likely begin in the next six to 12 months, which is when many repaired apartments should become available for rent.

"If enough repaired buildings come back on the market at the same time and rents go down because people want to fill the units quickly, then we could see a growing rate of foreclosures" in areas such as Northridge, Van Nuys and Sherman Oaks, said Stevens.

Fallout downgraded

The outlook for multi-family residential properties in the central and northern valley may be less than rosy, but some industry sources said the predictions of delayed fallout from the Northridge quake may be overstated.

"Vacancy rates for apartments were already going up before 1994, and the earthquake only exacerbated the situation," said Raffi Krikorian, managing partner at the Encino office of investment real estate brokerage Sperry Van Ness Investment Real Estate. Krikorian said that, in fact, the central and northern valley's apartment market has stabilized over the past few months. And, while there may be some bumps in the road ahead, the market has essentially landed, he asserted.

"The return of repaired properties will put downward pressure on rents, and we might see some spurts of foreclosures. But I don't think we'll see another big wave of foreclosures (like the one after the earthquake)," he said.

While sources differed in their assessments of the extent of future trouble in the central and northern valley apartment markets, most agreed that it would be some time before a true recovery takes hold there. Schwartz of Hanes Investment said it could be years before market conditions in earthquake-affected areas return to "normal."

Likewise, Krikorian acknowledged that apartment buildings in the worst-hit areas, regardless of whether or not they were damaged, remain stigmatized nearly 18 months after the quake. "Buyers still have a discounted way of looking at all of the buildings (in earthquake-affected areas)," he said.