Demand for housing is not being met statewide, and cities are scrambling to catch up. With thousands of units under construction or planned, and ever-increasing rents, Long Beach is no different. According to experts, the recent fear of rent control in Long Beach brought a general sense of caution to the multi-family residential market. However, that fear has been put at ease for now, with a local rent control initiative failing to receive enough signatures to be put on the November ballot.
“We saw a lot of highly active buyers in the Long Beach market holding off on making any purchases in the city,” Steve “Bogie” Bogoyevac, vice president at Marcus & Millichap and founder of the company’s Bogie Investment Group, said. “So we saw probably the most amount of inventory on the market in Long Beach that we’ve seen in years.”
Robert Stepp of Stepp Commercial is pictured at Patio Gardens, 4874 E. Los Coyotes Diag. “Currently, as the supply is tight, rents are increasing,” Stepp said. “However, as a number of new developments are delivered over the next few years and supply increases, rents will likely rise at a slower pace.” (Photograph by the Business Journal’s Pat Flynn)
Rising interest rates compounded the negative impacts of the rent control issue, Bogoyevac explained. Listings spent more days on the market, and closings were long and drawn out, he added. However, despite interest rates, once rent control was removed from the table, Bogoyevac said previously dormant buyers began making offers on multiple properties.
So far this year, the apartment market has a sales volume of over $527 million across 110 transactions, according to Robert Stepp, president of Stepp Commercial. The average price per unit is $234,476, and the average price per square foot is approximately $318, Stepp said. Cities across Los Angeles County are experiencing similar trends, with high volumes of sales within walkable, urban locations, he added.
With rent control removed from the equation, supply and demand will continue to determine asking rents, according to Stepp. “Currently, as the supply is tight, rents are increasing,” Stepp said. “However, as a number of new developments are delivered over the next few years and supply increases, rents will likely rise at a slower pace.”
Rents grew by double digits in 2015 and 2016, Stepp said, with the pace slowing in 2017 to around 5% or 6%. Over the last 12 months, average rent has increased about 3%, according to CoStar Group, a commercial real estate information company. Average asking rents vary greatly throughout the city depending on the neighborhood, Stepp said. In North Long Beach, average asking rents for units are around $1,400, whereas downtown and Alamitos Beach averaged over $2,100 during the first quarter, according to commercial real estate data and analytics firm REIS.
Steve Warshauer, left, and George Bustamante of Coldwell Banker Commercial BLAIR WESTMAC are pictured at Sara’s Apartments, 240 W. 7th St. “They stopped building 10 years ago. So you have a pent-up demand that’s not going to go away,” Bustamante said. “The projects that are coming online are servicing higher rents – an average rate of about $2,600 a month. Demand for the lower end is not being met.” (Photograph by the Business Journal’s Pat Flynn)
Prior to the Great Recession, Eric Christopher, senior adviser and director at Centennial Advisers, said Long Beach had a “heck of a run-up” in terms of increasing demand and asking prices beginning in 2000. The recession technically ended in June 2009, but it was not until around 2012 that prices began to slowly increase, Christopher explained. “People were still licking their wounds,” he said. Then, between 2013 and 2014, the current run-up in apartment activity began with new construction and increasing sales and rental prices, he added.
Even with creeping increases in rent over the last six or seven years, Christopher said many renters are not paying market value for their units. Mom and pop property owners do not want to deal with or risk vacancies, which causes them to leave their rents stagnant or increase them by small amounts, he explained. This gap between actual rents and market rate makes these properties desirable for investors and flippers, Christopher explained. Investors are able to purchase these buildings, make improvements to them and significantly increase rents – sometimes up to 40%.
At about 5.5%, vacancy rates are the lowest since the first quarter of 2016 and are expected to decrease to 5.2% by the end of the year, Stepp said. Despite thousands of units expected to come online in the next several years, some realtors do not believe the Long Beach market can ever catch up to demand.
“They stopped building 10 years ago. So you have a pent-up demand that’s not going to go away,” George Bustamante, vice president at Coldwell Banker Commercial BLAIR WESTMAC (CBCBW), said. “The projects that are coming online are servicing higher rents – an average rate of about $2,600 a month. Demand for the lower end is not being met.”
Christopher said workforce housing is one of the biggest needs in the city, adding that the abolition of the redevelopment agency in 2011 was a major setback for that market. The redevelopment agency would have provided the low- to moderate-income housing the city needs, he explained. Current issues with zoning and the number of units approved for certain lots is another hurdle that Christopher said the city needs to address if it is going to solve the housing crisis.
Steve “Bogie” Bogoyevac, right, and Shane Young of Marcus & Millichap’s Bogie Investment Group are pictured at a multi-family property located at 1912 E. 2nd St. “We saw a lot of highly active buyers in the Long Beach market holding off on making any purchases in the city [due to the threat of rent control],” Bogoyevac said. “So we saw probably the most amount of inventory on the market in Long Beach that we’ve seen in years.” (Photograph by the Business Journal’s Pat Flynn)
Christopher recently sold a 10,500-square-foot property that consists of a fourplex and a triplex on the back third of a two-parcel lot. The buyer had hoped to develop the remaining land but was told by the city that each parcel had been zoned for only two units each, meaning if the fourplex and triplex were demolished, only two units could replace the seven.
“If a developer could work with the city and demo that whole parcel without even challenging density requirements or setbacks, they could probably fit 15 units on that property,” Christopher said. “A city that really wants to create housing would figure out a way to make that happen because there are probably hundreds of examples of that going on. If we had more forward thinking at city hall, we could make a dent in this problem.”
Recent high-end developments, such as The Current and The Edison, are performing well and have occupancy rates in the mid to high 90% range, according to Stepp. He noted the recent sale of The Gallery 421 for more than $123 million as a sign of the demand for high-end properties. In addition to building amenities and onsite retail, The Gallery 421 has 291 one- and two-bedroom units that are listed for rents between $2,000 and $3,200, according to the complex’s website.
Steve Warshauer, also a vice president at CBCBW, noted that creating high-end housing does alleviate some pressure from low- and moderate-income housing stock by allowing individuals who can afford to do so to move into the new, more expensive developments. This upward mobility allows for residents of lower socioeconomic status to take up lower-rent units as they become available.
Warshauer and Bustamante said that Long Beach is in need of housing of all types – from extremely low income to moderate to luxury. Bustamante explained that companies such as Mercedes-Benz USA, Virgin Orbit and nearby SpaceX are bringing new residents to the city that can afford rental rates in the newest developments and in those coming online over the next several years. But current and planned developments are still not enough.
“Most of the builders I talk to say they would love to build more units, but the process to build anything in Long Beach or in California is expensive,” Bustamante said. “From the city to the county to the state, the fees have gone up tenfold.”
“Unless government really cuts loose all the red tape and makes it easier to build, it’s going to be a major problem for quite a while,” Warshauer added.
On top of the current red tape and cost, Warshauer said some increased parcel taxes could be on the horizon for property owners. Earlier this month, the Los Angeles County Board of Supervisors voted to place a parcel tax on the November ballot that would fund the proposed Safe, Clean Water Program. If approved by voters, all nonpermeable commercial and residential property – areas such as roofs, driveways and patios where water does not enter the earth and creates runoff – would have an annual tax of 2.5 cents per square foot.
“Parcel taxes coming down the pipeline aren’t going to have positive impacts on the market,” Warshauer said. “Every time somebody needs some more money because they wasted what they already had, they say, ‘Oh, let’s tax everybody who owns a piece of property.’ It’s an easy target. Unfortunately, it’s been hit so many times.”
Eric Christopher of Centennial Advisers is pictured at a Long Beach apartment complex located at 1119 Dawson Ave. “A city that really wants to create housing would figure out a way to make that happen,” Christopher said. “If we had more forward thinking at city hall, we could make a dent in this problem.” (Photograph by the Business Journal’s Brandon Richardson)
Despite high costs and red tape, Long Beach has more than 30 multi-family projects under construction or planned by private investors – not to mention six single-family developments, including detached homes and townhomes. Bogoyevac explained that developers and investors are drawn to Long Beach because it has been overlooked for so long and is a great value compared to surrounding areas. Also, being centrally located between Los Angeles and Orange Counties, the city is ideal for employees in either market who desire cheaper rents.
Christopher likened the market to a Monopoly board, where investors are sitting on one side where expensive properties are located – Santa Monica, Newport Beach and the like – and see Long Beach on the other side. He said investors are realizing they can get more units for their buck in Long Beach.
The price disparity within Long Beach itself is causing a shift within the market, Bustamante explained. He said the number of transactions in the high-end areas, such as downtown, have slowed, while North Long Beach and the Westside are more robust because of the higher return they offer investors.
Warshauer has lived in Long Beach since 1969, and noted that the current “explosion” of residential activity is like nothing he has ever seen. All the agents agreed that it is impossible to tell how long the city’s apartment boom will continue, but each noted it is unlikely the market will change any time soon – save unforeseen governmental interference or an economic downturn.
“We are already seeing the downtown construction boom move into other parts of Long Beach – perhaps not at the same rate, but there are a number of new projects in the pipeline in East, Midtown and North Long Beach,” Stepp said. “Given the strong economic factors within the city, its location relative to Los Angeles and Orange County, its non-rent control status, and its growth projections over the next 10 to 15 years, Long Beach is poised to perform very well over the long-ter