As we are in the home stretch of 2005, it is a good time to see where we have been, comment about the outlook for the balance of the year, and offer a few preliminary thoughts for 2006. This is certainly the time of year for this type of review and forward look about what is ahead. Various real estate conferences in the market have started this same process.
The “Apartment – 2005” conference, held on September 27th at the Westin Century Plaza Hotel, brought together some of the brightest minds in the industry to review the apartment market. For those of you who did not attend, I will summarize the overall themes presented in three bullets:
• This year’s direction of interest rates is still confusing to everyone. Why is that, you ask? Well, the Federal Reserve has raised their benchmark Federal Funds Rate eleven times since mid-2004, but long term rates, as evidenced by the 10-year Treasury Note, is lower for the comparison period. Since there is a consensus that the Federal Reserve will continue to increase their rate, it was generally agreed by the lender panelist at the conference that real estate rates will be higher in 2006.
• Condos, Condos, Condos… did I mention condos? The overriding theme at the conference is that the condo conversion and condo development market has cut a major swath in the apartment market. According to the stats presented, 25% of the Los Angeles apartment sales during 2005 were sold for condominium conversion. If you think that is high, the San Diego figure is 60%! This sector activity is no blip or passing fad, rather, it is a serious market shift due to the low Affordable Housing Index in most major markets around the country. Also fueling this condo conversion activity is the fact that at current apartment prices (existing properties or a new developments), it is nearly impossible to profitably operate an apartment as an apartment.
• Money, Money, Money… did I mention money? Whether a panel at the conference was comprised of developers, lenders, brokers, or economists, there was general agreement that money (debt and equity) is available and plentiful, and will continue to be so. The ‘money people’ did indicate that they are beginning to be more careful in their underwriting. Most articles on this topic in major publications have been signaling this shift for months now.
Now, let’s look at the Santa Monica trends and see if we can draw some conclusions. The following chart summarizes the apartment sales activity in the city of Santa Monica from 2000 to September 30, 2005. We have identified seven key indicators for your review.
Based on the chart, here are some of our conclusions regarding apartment market activity in Santa Monica:
• The number of sales has been relatively constant during the review period. It appears that 2005 might be one of the more active years.
• The 4.66% Capitalization Rate (CAP Rate) is nearly a half a percent point lower than the Los Angeles County average for the same period (5.03%).
• The 14.54 Gross Rent Multiplier (GRM) is trending about 10% higher than the Los Angeles County average for the same period.
• The $187,167 Price Per Unit is significantly higher than the Los Angeles County average for the same period ($143,701).
• The $260.84 Price Square Foot is significantly higher than the Los Angeles County average for the same period ($184.15).
With all of the above in mind, what is the outlook for the rest of the year, you ask? Here are my thoughts:
• There will be a continued increase in the sale of apartments as more owners choose to take advantage of today’s high prices.
• Buyers will continue to pay high prices as long as they can finance property at today’s low interest rates and creative loan structuring.
Now, let’s take a peek at an early-2006 forecast (a more thorough one in the next WAM issue):
• More sellers will come to the market, resulting in more available properties, which will be good news for the 1031 exchange buyers.
• Santa Monica apartment prices will continue to be generally higher than in the rest of the L.A. County.
• The Gross Rent Multiplier (GRM) and Capitalization Rate (CAP Rate) for Santa Monica apartments (and the market in general) will stay at the current record-breaking level through the end of 2005, and then slowly decrease in the first quarter of 2006 if we see an increase in interest rates and more stringent underwriting criteria of lenders. Thereafter, both indicators will remain flat for the rest of the year.
• The L.A. County condominium conversion activity will remain fervent as long as there are properties that meet the criteria, including the conversion of “B” and “C” properties. Because Santa Monica law’s now restrict condo conversions, that activity will not affect Santa Monica apartment property values. 
|
