Southland Apartment Boom Expected to Ebb

After booming in recent years, the apartment industry is headed for slower growth, requiring landlords to accept smaller rent increases and forcing investors to look harder for bargains, according to panelists at an industry conference.

Southern California, however, affords more investment opportunities than other parts of the nation, where apartment and real estate markets were quicker to recover from the recession of the early 1990s. Still, apartment owners will be hard-pressed to find properties that will allow them to reap the profits the industry has chalked up in recent years.

“It’s time to proceed cautiously, but there is a lot of opportunity out there,” Diedra Pellegrini, managing director of Bank of America, said during her presentation last week at the annual Apartment Outlook conference in Century City.

The apartment business in Southern California remains one of the healthiest in the nation, with vacancies below 5% in Los Angeles County and below 3% in Orange and San Diego counties. Job growth across the region remains strong, and, in many communities, there is little available land on which to build new properties, limiting the threat of overbuilding that looms in such cities as Las Vegas, Atlanta and Dallas.

Darby Keen, president of R&B; Realty Group, a real estate investment trust focused on apartments, said R&B; is investing in areas where it is relatively difficult to build new properties. “I think Southern California is one of those markets,” he said.

Yet Keen and other panelists at the event, which was sponsored by the Real Estate Conference Group, said the days of picking up bargain-priced apartments in well-regarded areas are over for the most part.

Many apartment investors and operators “believe that certain markets have peaked in Southern California,” said Paul A. Trevino, senior vice president of the Sares-Regis Group.

In particular, markets in affluent local areas--notably the Westside and the South Bay--saw property values and rents skyrocket as the region recovered from its deep slump. Future increases will be modest at best in these areas, industry observers say.

“I think [investors looking to buy] are two years too late--at least for the best buys,” said broker R. Rand Sperry of Sperry Van Ness.

Apartments with the potential for substantial rental and property appreciation now require more costly renovations or are located in lower-income neighborhoods or inland areas, such as the San Gabriel Valley and the Inland Empire.

“They might have some of the best growth prospects,” said James DeBeau, manager of client services for Marcus & Millichap, a real estate investment and services firm.