Study says viability will continue for at least five years
Despite tightening capital availability and overbuilding in some markets, Los Angeles will be one of the hottest spots in the country for real estate investment in the next five years, according to a new study by the Big Six accounting firm Ernst & Young.
Los Angeles was ranked the top apartment real estate market in the country and second or third in the four other categories, according to the study, which featured rankings by 400 real estate experts from across the country.
Soaring demand for affordable housing and slumping returns from the overbuilt office market have led to a shift to apartment investing by the area developers and investors, said Rick Bobrow, western region director of real estate services for Ernst & Young.
With fewer and fewer Angelenos able to afford their own homes, demand for apartment housing is booming and will continue to rise over the next five years, the study concluded. That demand will fuel higher rental which, in turn, will translate to healthier investment returns for apartment owners.
The five sectors measured by the report were the central business district office, in which Los Angeles ranked third; suburban office, in which Los Angeles ranked second; warehouse, in which Los Angeles ranked third; retail, in which Los Angeles ranked second and apartment.
The report said that nationwide apartment and warehouse prices and rents will appreciate the most rapidly of the five sectors surveyed, with apartment prices expected to rise 4.2 percent and rent 4.5 percent a year. Warehouse prices are also expected to rise a swift 4.2 percent per annum and rent by 4.1 percent per year. Still, that will not keep pace with inflation, which is expected to rise by 4.8 percent per annum.
The performance of the various real estate sectors was directly related to whether they were in oversupply on the market, said Bobrow. "Apartments and warehouse came out looking the best because they have not been oversaturated with development in the past 10 years," he said.
Locally, recently released Ernst & Young figures revealed that office and industrial return on investment declined while retail return on investment rose from fourth quarter 1988 to fourth quarter 1989. Office prices rose by 7.7 percent, rent by 1.8 percent, and the capitalization rate, an indication of return on investment computed by dividing a property's net annual operating income by its purchase price, declined by 1.5 percent for office properties.
Industrial prices appreciated even more slowly throughout the country, by .9 percent from fourth quarter 1988 to fourth quarter 1989. Industrial rents increased by 4.3 percent and the capitalization rate declined by 1.2 percent over the same period.
Capitalization rates for office and industrial properties have been declining since 1985.
The picture was somewhat brighter for retail properties. Prices appreciated by 7.6 percent, rents increased by 4.0 percent, and the capitalization rate reversed four straight years of decline and increased by 2.5 percent from fourth quarter 1988 to fourth quarter 1989.
Despite the decline in the local office capitalization rate, Bobrow boosted Los Angeles' office market future. "The office situation is improving due to a contraction of capital and a slowing down of overbuilding," Bobrow said. "It's a very diverse market and it's becoming the financial capital of the United States."
Bobrow and other local real estate experts also noted activity in several niche markets. Investors have shown increasing interest in hotels and community centers such as power and superpower centers, and golf courses for Japanese investors.
"There's tremendous demand for neighborhood shopping centers anchored by food and drug stores," said David Doupe, senior equity director of the financial services group of Cushman & Wakefield of California.
Despite comparatively high marks for the local real estate markets, many real estate experts said that Los Angeles is suffering from the same credit problems that are wracking the nation.
Developers and investors alike are having difficulty obtaining advances, said Richard Lund, regional sales manager of investment properties for the western region of Grubb & Ellis Co. That, he said, will drive prices down as many developers sell because they can't get refinancing.
Problems exist for many developers and investors where pro-forma rents on loan documents have exceeded realized rents. That has led to difficulty replacing expensive construction loans with takeout financing, he said.
The income-debt servicing discrepancy has led some observers to predict a major price adjustment in the local real estate market.
"I maintain that you will have a dramatic escalation in rents or a depreciation in property values," said Paul Debban, managing director of Reorganized Securities Group, a downtown Los Angeles-based bankruptcy representation firm.
With banks tightening lending requirements and savings and loans largely limited to home loans, the result has been an investors market for the few local investors with sufficient capital and real estate experience, he said.
"Right now affluent people have their pick of the projects," said Ron Saienni, president of Quantum Development of Newport Beach.
The financial squeeze is likely to continue indefinetely, Lund said. "The problem won't go away until financial institution problems go away," he said.
Another set of institutional investors, pension funds, have also slowed their activity nationwide and "unfortunately in Los Angeles County," Doupe said. "I think it is a short term occurance; most indicators are still positive."
Lund and other real estate experts said that they have advised their clients to invest in areas of the county, such as the Westside, where growth limitation ordinances have been passed.
Small investors may be able to take advantage of sales of small properties by developers who must sell the properties at reduced prices to pay current construction costs on other projects, he said.
A bright investment spot in the office market may be "vanity office," buildings with distinctive architecture that appeals to professionals and usually have a lower turnover, in areas such as Mid-Wilshire, Venice, Pasadena and Santa Monica, said Sanford Goodkin, national executive director of the KPMG Peat Marwick/Goodkin Real Estate Consulting Group. "These will go through a real renaissance."
Goodkin warned, however, that real estate novices thinking of investing should deal with builders with good reputations and realize that for the moment many real estate opportunities in the county are not golden investments. "Many people think they are sophisticated because they have made money previously in real estate -- well, all the rules have changed."
p
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment