DOWNTOWN LOS ANGELES - The past two years have seen a rush of investment in Downtown residential buildings, with a slew of national companies paying big money to acquire Central City apartment complexes. During that period, no entity has spent more than Chicago-based real estate behemoth Equity Residential.
The firm, a publicly traded real estate investment trust, or REIT, has quickly grown into one of the area’s biggest housing players. In 2011, Equity acquired seven Downtown properties, paying a total of $461.3 million, according to company financial records. In 2012, Equity spent another $35.5 million to add the 99-unit Milano Lofts to its Downtown roster. It is also building a major Chinatown project.
Equity’s holdings make it Downtown’s second-largest market-rate residential landlord, with 1,650 apartments, including the under construction 280-unit Jia Apartments in Chinatown. Only Geoff Palmer, whose GH Palmer Associates has created more than 2,000 apartments, most of which are housed in his Italian Renaissance-inspired buildings west of the Harbor (110) Freeway, owns more. (Palmer is also building more).
Equity’s purchases run the gamut in style and location. It has units in older buildings in the heart of the urban core such as the Milano Lofts and the Pegasus Apartments, and it also picked up newer properties, among them the Glo Apartments on Wilshire Boulevard in City West.
Ranking as a top property owner in Downtown Los Angeles might seem like a major achievement. For Equity, however, the local status is a thin feather in an oversized cap. With a market capitalization of $18.34 billion, the firm founded by real estate tycoon Sam Zell and Bob Lurie is the largest publicly traded housing company in the country. In Los Angeles it owns some 10,000 units.
According to company Senior Vice President Tony Duplisse, who heads up acquisitions in the Southwest, Equity had been eyeing Downtown for a while before it made its big acquisitions push in 2011.
The timing “was really more about the opportunity,” Duplisse said. “We have always been keeping an eye on Downtown but trying to figure out when to get involved.”
Equity’s sizable stake in Downtown makes it an important player in the local market, in part because its investment tends to attract other large players.
“You have a large, national, multifamily REIT making a big bet on the Downtown marketplace, as opposed to in the past it’s mostly been just local developers,” said Downtown broker Mark Tarczynski, executive vice president at Colliers. “It further legitimizes this market as a viable institutional investment market.”
Indeed, Equity’s appetite for Downtown housing is not unique among national entities. Other REITs growing their Downtown portfolios include Essex Property Trust, which in the past two years has added to its roster the four-building Santee Court complex and the Pacific Electric Lofts. Avalon Bay Communities, Equity’s top competitor among REITs, is developing its first Downtown project, Ava Little Tokyo, a 280-apartment complex at Second and Los Angeles streets.
All of these companies are chasing the same sweet spot for property owners in the supply/demand curve. Occupancy in the Downtown area is approximately 98% and rental rates are steadily increasing. While a slate of new projects are in the pipeline, experts expect rents to continue to rise in desirable areas.
So does Equity.
“I don’t see the current pipeline of supply interrupting the opportunity for continued rent growth, not at all,” Duplisse said. “I think it is a healthy supply. It will be readily absorbed and in demand.”
Change in Strategy
Stan Ross, chairman of the USC Lusk Center for Real Estate, said that corporate investors like Equity often go down a sort of micro-economic checklist before acquiring an apartment building. These days, the requirements include a positive forecast for rent growth; proximity to amenities, from schools to entertainment options; and potential job growth.
“When they go through their checklists on their investment committees, they’re all there in Downtown,” Ross said.
For Equity, the focus on Downtown is also part of a macro-economic strategy of investing more in urban, transit-oriented markets. The firm’s ascendance to the largest publicly owned multifamily landlord has corresponded with a shift away from lower-end housing projects and toward buildings that command top-of-market rents.
According to company financial records, since 2005 Equity has sold more than 129,000 apartments in what it terms “non-core” markets. In that same time frame, it has acquired more than 44,000 units in more desirable urban rental markets such as Boston, New York, Miami, San Francisco and Southern California.
“Fifteen years ago, our mission was to be in every major market in cradle-to-grave rentals, and today we are looking to be more urban, more transit oriented, newer and higher quality,” Duplisse said. “Our markets of coverage have shrunk dramatically.”
In search of new acquisitions, the firm is not only going after the properties that are on the for-sale market. Early last year, Equity representatives approached Downtown real estate veteran Izek Shomof about acquiring the Milano Lofts, an adaptive reuse project that Shomof had opened in 2009.
At first, Shomof rebuffed Equity. The Milano Lofts, a 99-unit building at Sixth Street and Grand Avenue, was not for sale, he said.
“They said, ‘We’ll give you a number you cannot refuse,’” Shomof recalled.
That number, according to a source familiar with the deal but unauthorized to comment, was $35.5 million, or nearly $360,000 per unit. Shomof opted to sell.
Equity also offered to buy Shomof’s two buildings on the 600 block of South Spring Street in the Historic Core — Premiere Tower and Spring Tower. Shomof declined, but he was struck by what Equity’s interest said about a local market once played only by risk-taking pioneers.
“In the past few years those big companies didn’t want to come Downtown,” Shomof said. “Now that Equity is being aggressive it shows that there is demand here.”
Unlike many small developers, which often sell their completed properties after a relatively short time period, REITs such as Equity tend to hold on to buildings for longer stints — as long as rents are steadily increasing, said Ross from USC’s Lusk School.
“You’re going to see long-term holds on those assets that demonstrate that they can generate the cash flow,” Ross said.
Even after going on a veritable shopping spree in the Central City, Duplisse said Equity plans to continue growing in Downtown through additional acquisitions and building new projects. If the firm remains somewhat under the radar, Duplisse said Equity’s local plans this year include getting involved with area community and business groups.
Contact Ryan Vaillancourt at firstname.lastname@example.org.
Equity Residential’s Downtown Holdings
In the past two years, Chicago-based Equity Residential has been on a buying spree in Downtown Los Angeles, paying nearly $500 million for eight properties. Here is what it owns
Glo Apartments: 201 units, 1050 Wilshire Blvd., Purchased in 2011 for $64.7 million
Mozaic at Union Station Apartments: 272 units, 888 N. Alameda St., Purchased in 2011 for $61.1 million
Sakura Crossing Apartments: 230 units, 235 S. San Pedro St., Purchased in 2011 for $57.5 million
Pegasus Apartments: 322 units, 612 S. Flower St., Purchased in 2011 for $100 million
Hikari Apartments: 128 units, 375 E. Second St., Purchased in 2011 for $41.9 million
Milano Lofts Apartments: 99 units, 609 S. Grand Ave., Purchased in 2012 for $35.5 million
Artisan on 2nd Apartments: 118 units, 601 E. Second St., Purchased in 2011 for $44.1 million
Jia Apartments (formerly Chinatown Gateway): 280 units under construction, Cesar Chavez Avenue and Broadway, Land purchased in 2011. Land plus development costs total $92 million
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