Condo Conversion Limits Won’t Dent L.A.’s Pricey Rents

L.A. apartment rents are already high, but experts say they may go higher.
By: DANIEL MILLER: Los Angeles Business Journal Online
Expect L.A.’s already pricey apartment rents to keep rising despite the vote by the City Council last week to enforce an ordinance limiting condominium conversions.

The law will make it harder for landlords to turn apartment buildings into condominium complexes, but real estate experts say the effect on the tight rental market will be negligible.

Los Angeles County has the most expensive rental market in the Western United States, with average asking rents hitting $1,595 in the third quarter, up 8.4 percent from a year ago, according to figures provided by Grubb & Ellis Co.

And the overriding factors driving up those rents have not changed: an extremely expensive housing market that makes it hard even for middle-class renters to become homeowners. That keeps renters in their units, while new apartment construction has been unable to keep up with rental demand driven by a local economy that is creating jobs.

“I don’t see the rental market tapering,” said Harold Greenberg, chairman of the government relations committee for the Apartment Association of Greater Los Angeles. “You are not building the units.”

That’s not to say that the law will not have some effect. Housing activists estimate 12,000 rent-controlled apartment units have been converted into condominiums or torn down to make way for new construction in the last five years, with the pace accelerating since 2005.

Moreover, there is evidence that the swooning housing market may cause landlords to pull back any plans to convert their buildings; some newly constructed condominiums downtown and elsewhere in the county are being rented for a lack of buyers.

However, the city and county still have one of the tightest rental markets in the country, with demand far outpacing supply. A recent report by Marcus & Millichap Real Estate Investment Brokerage Co. noted that vacancy in the county is expected to be a low 3 percent by year’s end.

That has emboldened landlords to raise rents when they can.

“You put a for-rent sign up in West L.A. and it is good as gone,” said landlord Robert Roth, who owns two two-bedroom apartments in Westwood that rent for about $3,500 a month.

“I have been able to raise rents and I am pretty sure I could raise them higher than what I am currently renting them for. I am pondering doing that,” he said.

While L.A’s rent control ordinance limits increases to 4 percent annually in buildings constructed prior to 1978, that cap comes off when a unit changes hands. There are no controls on newer construction. Moreover, many other cities in the county have no controls at all.

Broken dreams

Roth is not alone. Sylvia Brakha, a landlord who rents a two-bedroom, two-bath apartment near Pico and La Cienega boulevards for $2,000, said she plans to raise the rent by about $500 when the unit becomes vacant – even though she worries that expensive rentals are making it nearly impossible for renters to save enough to own a home. (In October, the median price of a home in L.A. County was $545,000.)

“To buy a home you have to have a minimum of $100,000 or $200,000,” said Brakha, who owns three rental properties citywide. “How many people can save that kind of money?”

Lane Schwartz, a regional manager for Marcus & Millichap, which deals in multifamily properties, said the problem is particularly acute in West Los Angeles.

The Westside is a pricey area and percentage increases there result in rents going up faster than elsewhere, Schwartz said.

The Grubb & Ellis figures do not provide data for the entire West Los Angeles area, but in Brentwood, for example, a two-bedroom, one-bathroom unit goes for $2,200. And even in rent-controlled Santa Monica the average asking price of a two-bedroom, one-bathroom unit was up 19 percent in the third quarter to $1,667. Again price gains are possible because landlords can raise rent significantly in between tenants.

“It’s just supply and demand, I guess,” said Keith Ellison, an investment banking analyst who lives in Westwood with two other people in a two-bedroom apartment that costs $2,650 a month. “It’s not discouraging. It is what it is.”

The rise in rents did stir up housing activists to force a vote on the condominium conversion enforcement issue but it is unclear how much more the activists could do to limit rental rates.

Efforts to expand rent control around the county have not been successful in the past.

Moreover, the conversion ordinance the City Council decided to support was not enforced by the city for good reason. The City Attorney’s Office believes it may conflict with a state law regarding landlords’ right to convert their units. In addition, the law does not prohibit conversions, but only gives the city the right to refuse them if a building’s vacancy rate drops below 5 percent.

Larry Gross, executive director of the Coalition for Economic Survival, said that the City Council’s vote last week will help to preserve the existing rental stock, but he also worries that high rents are keeping the middle class out of the ownership market.

“The middle class American dream is being blown to pieces by this housing market,” said Gross. “It’s unlikely they will ever be able to own a home in Los Angeles.”

Mitigating trends

Of course, one of the reasons rents are so high, is that there is a steady supply of tenants who find ways to afford them, even if it means using up a greater share of disposable income.

“I’m sure there are people who can’t afford apartments,” said Roth, also the spokesman for BidRent.com, an online marketplace for rental properties. “I haven’t encountered them. I only get calls from people who are interested.”

Tenants also can find more affordable units when they move away from high-demand areas. Even in Encino, one of the pricier rental markets in the San Fernando Valley, the average asking rent for a one-bedroom one-bathroom apartment was up 25 percent in the last year to $1,368, but that’s still $500 cheaper than Brentwood.

Then there is the issue of a potential oversupply of newly constructed condominium units that developers are deciding to rent instead of sell.

In September, for example, Lincoln Property Co. cancelled its plans to sell units at a condo development called Mozaic in downtown Los Angeles. But with each apartment featuring granite countertops, stainless steel appliances, hardwood floors and vaulted ceilings, penny pinchers need not apply.

Studios start at $1,500 and two bedrooms are $2,500 and up.