Investors Again Discover Golden State Has Glitter

The “Buys of Texas” that beckoned California real estate investors in the late ‘70s and early ‘80s have dried up as much as the oil industry, and now many of those same investors have headed home.

Seeking gold in them thar hills? More likely seeking the hills themselves. And looking for cash returns on other properties as well.

Often, through syndications, these investors are building and buying, hanging their hopes on a vision of the revived California marketplace.

They left California to escape rent controls and escalating prices, but when the Texas economy slipped, things started looking better back home.

Things are better. California real estate still isn’t cheap. Local rent controls are still here. But prices are now more on a par with those in the rest of the country. As Joel Singer, research director of the California Assn. of Realtors, explained it, “Deals are penciling out much more strongly in California now.”

And as for rent controls, investors have found that some are quite tolerable. Some even go so far as to exclude new apartments, and this partially accounts for a surge in apartment construction.

Last year, 157,000 rental units were built in California, and that was the highest number since 1963, when 190,000 were constructed, according to Ben Bartolotto, director of the Construction Industries Research Board in Burbank.

Bartolotto expects apartment construction to be down about 15% from last year, “mainly because a lot were brought on stream sooner in anticipation of tax reforms, which have created a lot of uncertainties.”

‘Whole Big Country’

Even with these uncertainties and the expected construction drop, though, investors, developers, researchers and consultants alike paint a rosy picture of the Golden State.

Like Robert Charles Lesser, a Beverly Hills consultant.

He says that the California marketplace is “a whole big country all by itself, and there’s no reason for anyone to leave even Southern California. You could spend a whole life just managing, building and investing in Southern California. In terms of growth, move over, move up, move down, rehab--It’s all right here.”

No doubt about it, California has a lot going for it. Like Texas, it’s in the Sun Belt, but unlike Texas, which is so dependent on the oil industry, California has a diversified economy.

Economy Diversity

Stanley Ross, co-managing partner of the certified public accounting firm of Kenneth Leventhal & Co., said from his office in Century City, “It’s not only true that California investors are returning to the state, but the rest of the country is also looking at California because the economic indexes are fantastic here on all fronts.”

It is strong in the defense, tourism, service and entertainment industries. “It is the Pacific Rim,” Ross said. “It is the financial center of the West. So we’re seeing more capital coming in here than in many other places to make the investments.”

And California is growing. Kenneth Rosen, chairman of the real estate department (also known as the Center for Real Estate & Urban Economics) at UC Berkeley and manager of real estate research at Salomon Bros. in New York, said that California is growing economically about 3% a year while the nation as a whole is only growing 2.6%.

“It’s also the largest state in the country in terms of population and numbers of people employed,” he continued. “Of the 98 million people employed in the country, 11.1 million are employed in California. New York is second with 7.7 million employed.” California’s employment figure would increase to 12.1 million if self-employed people were included.

Immigration Growth

California has a population of 27 million, he added, and that’s growing with the immigration of people from Indochina, Mexico and Central America.

“California’s newest feature is its ethnic diversity, which is making new markets,” Lesser said.

New people and new markets create demand, which Stephen J. Geiger, Toluca Lake real estate broker/developer/investor, says California has more of than any other state.

“No question about it,” he said, “many investors who went out of state, including myself, are coming back because all the areas we went into lacked the demand that California has with its huge population and economic bases. Without demand, you don’t get growth in cash flows and appreciation--you don’t have stability.”

‘Building Cycle Missed’

Another reason for the demand, at least for apartments, was suggested by Larry Kates of Standard Investments in West Los Angeles: “Because of rent control, apartment builders stopped building for a few years, so a building cycle was missed in the early ‘80s. Now there’s unlimited demand.”

Despite the demand and other pluses for investors and developers in California, the state isn’t perfect. As Rosen noted, its income tax is high. “And its educational expenditures are not up to the national average.”

But syndicators, those people who put a number of investors into a single project, are finding that California is, as Rosen describes it, “generally, very positive.”

It’s a ray of sun to an industry that has been weathering some storms. In March, a real estate newsletter published by Stephen Roulac & Co. of San Francisco referred to some of these difficulties, saying, “Problem properties stunned real estate syndicators recently by forcing foreclosures or threats of foreclosure by Balcor/American Express and Hall Financial Group and by contributing to recent failures of two other syndicators.”

Problem Properties

The newsletter then listed 14 syndicators, including Balcor and Hall, with “publicly disclosed problem properties.”

Later, the newsletter said that many of the problem properties are in “energy-related geographic areas,” mostly in Texas and Oklahoma, but “they are also widely dispersed geographically.” They also included office complexes and shopping centers besides apartments.

Reasons for the problems? The newsletter stated: “While many properties are over-leveraged, they also are overvalued and troubled by high vacancy rates.” It also suggested that the “soft, overbuilt real estate market” in some locales was a contributing factor.

Federal tax proposals are another concern to syndicators, because many relied heavily on tax incentives. Dependence on tax shelters helped create problem properties.

Tax Revision Plan

Some tax proposals redefine tax shelters, Ross explained, “so that if you are a limited partner in an apartment building, for example, and you have a tax loss, you can’t offset that against your salary.” There is also a plan to extend depreciation.

“So investors are being cautious about real yield,” he said, “and California investors are looking better, because they are looking less to the tax benefits and more to the pure economics and yield.”

As Lesser put it, “If you can’t hide behind the tax benefits and must compete with other investors, I’d rather do it in California than Iowa.”

California has one thing for Californians that no other state could ever have: proximity.

Feels More Comfortable

Al Sackler, a vice president of West L.A.-based Moss & Co., which has apartment and commercial investments, said that he feels “more comfortable” with projects close to home. Moss & Co. went to Texas when rent controls were being enacted in California but started returning during the past year.

Rodney Delson, a Santa Monica real estate broker and syndicator, decided not to go out of state even when other investors did “because we thought it was prudent not to, from a management standpoint.” He likes to be no more than an hour away from his investors’ properties, “because we feel that management is a key to a successful syndication.”

However, Walter Silber, president of Brentwood Financial Corp. in Westwood, led his investors out of state in the late ‘70s--”when you couldn’t buy an apartment building in California without a negative cash flow,” he said--and is just now reentering the California marketplace.

Atlanta His Best Market

“We sold all 35 or so of the apartment buildings we have in Southern California and went out into the hinterlands of Atlanta, Birmingham, San Antonio, Austin, Denver, Salt Lake City, Portland, Ore., Oklahoma City and Seattle, which we’re just now entering,” he said, “and the results for us were mixed.”

The best market outside California for him was in Atlanta, which he called “outstanding,” but even so, he concedes, “in balance, we would have probably done as well or better by staying in California.”

Building in San Diego

Among others who left the state were Sylvan Swartz, Consolidated Capital, R&B; Enterprises, J. D. Alexander and developers Lon Rubin and Alex G. Spanos, who left to build apartments in Texas and other states, although Spanos kept his headquarters in California.

Now Spanos is building apartments again for the first time in five or six years in California, and he’s building them for the first time in San Diego, which is considered a very hot apartment market. (Spanos owns the San Diego Chargers.)

Rubin is building apartments for the first time in 12 years in California, after leaving the state to build nearly 8,000 units in Texas, Florida and North Carolina. He’s concentrating on several projects in Hollywood.

Swartz, president of the Orange County region, National Assn. of Private Placement Syndicators, is holding onto the properties in Tennessee, New Mexico and Texas that he started acquiring in 1979, but he is now buying apartments and strip shopping centers in Southern California.

Purchases This Year

Consolidated Capital, absent from the California marketplace for a few years, is holding onto properties elsewhere but has acquired about $120 million in California real estate during the past 12 months, with about 70% purchased since January, according to Thomas Trimble, senior vice president of property acquisitions for the Emeryville-based firm. Its latest acquisition, a $4.1-million commercial building in Orange, was announced last week.

“We’re still in Texas, unfortunately,” Larry Carlin of Los Angeles-based R&B; Enterprises said, but R&B; is also still holding onto California properties it has had for years. The firm owns commercial properties in several states, but it owns or manages about 25,000 apartments, mostly in California, although it also owns 6,500 units in Houston, where oil-industry cutbacks hit heaviest.

There probably are some real estate bargains in Texas, said Gary Aminoff, whose Beverly Hills firm has been in and out of Texas in apartment investments, “but it’s too risky for me.”

Not for J. D. Alexander, who left his asset-management and syndication office in L. A. a couple of months ago to run the San Antonio investment brokerage arm of Compass Property Management, which his firm merged with in the past few months.

“I believe that within two years, Texas will again become the fastest-growing area of the U. S.,” he predicted.

“The reasons?” “Because all the facilities and government structures are in for the cities to grow. Texas is ripe for industries to come in, and its cities are offering major concessions to outside employers.

“Texas is more motivated than other parts of the country to attract businesses. It is in the Sun Belt. And it has more room to grow than most industrial cities of the country.”

Besides, he reasons, “now there’s a rush of money flooding into California, chasing too few deals. That will again drive California prices above national prices, which is why people left before.”

Norman Jacobson, whose L. A. firm has been putting together partnerships to buy apartments in Northern California for some time, agreed that “it’s true--the syndicators who left California are coming back, but all that glitters is not gold, and unless it is structured to make sense, a deal--even in the best part of California--can go bad.”

The California market is ‘a whole big country all by itself.’