A 10-year review of trands in apartment sales and prices

Special to Real Estate Resource As I look back at the last decade selling apartment buildings, the only word I can use is "shock." A lot of investors lost a lot of money, while many more made small fortunes. Real estate careers were ruined and people's lives were shattered. The good news is that through the? end of 1997 (1998 final figures are not in yet), with the exception of four- to 16-unit apartment buildings in Orange County, the decline in values : " In Orange County, buildings with 17 or more units peaked in 1990 at $73,661 per unit and fell to $44,717 per unit in 1996, a 39.3 percent decline. In fourto 16-unit complexes, they peaked in 1989 at $74,199 per unit and then fell to $59,161 per unit in 1997, a 38.9 percent decline. It's hard to believe, but as of the end of 1997, they had still not registered a full year dr1 ' increase or even a stop ' - decline. This year, however, should reflect the turnaround in smaller units in Orange County. The fact is that it has taken three years for the region as a whole to have experienced a turnaround. While one reads about double-digit price increases in residential homes in Orange County and west Los Angeles, the same cannot be said of apartment building sales. The recovery is here and ongoing, but at this time, according to the statistics, the turnaround is modest. As of the end of 1997, a recovery was not evident in four- to 16- unit buildings in Orange County. The primary driver of value is rents and as they rise, so will apartment values. . . On the other hand, the number of transactions among apartment buildings is another story. In Orange County, in the 17- or-more unit category, there were 85 transactions in 1990 in 1996. This is the recent peak in the number of sales. There were 197 transactions among four- to 16- unit units in 1990 and 387 in 1995 which is the most for the decade. Ironically, as prices. Investors snatched them up and in many categories of 'Units, sales peaked in the 1995- 1997 category. There is no doubt the overall trend is up. The underlying trend that people miss is rents and tenants. Due largely to job celebraties, many tenants balked at high rents from 1990-96. Landlords sensed the reluctance and began discounting rents with free rent and by adding amenities like microwave ovens. Keep in mind many landlords during this five-year period froze rents and if one accepts a 4 percent inflation rate .duping that period, actual l rents really fell by 20 percent. This is assuming a landloid not lower the rents. As we see demand rise along with landlord confidence, we will see the "i inevitable rise in rents and then the rise in prices. I Looking back on the debacle; I am amused with those who incorrectly predicted that the; decline was over. As many ,1 readers will recall, many 4 experts beginning in 1992 mistakenly spoke of an upbeat J market right around the corner. In reality, prices went downhill from 1990 to 1996; the longest and most dramatic, value decline in the history California apartment buildings. Those with strong equity positions have weathered the situation fine and many have actually increased their apartment portfolio. Many who leveraged substantially in the late '80s, however, have favourit themselves in precarious suctions. The current Asian crisis am it relates to California real estate is a major unknown possible slowdown in the national economy also may have a negative impact. Job: growth, however, the leading indicator for the future of apartment values, remains strong.