MARKET SNAPSHOT: West San Gabriel Valley Outperforms the East

By Erika Schnitzer, Associate Editor San Gabriel, Calif.—The West San Gabriel Valley is outperforming the East San Gabriel Valley, asserts Daniel Withers, senior associate-National Multi Housing Group in Marcus & Millichap’s Encino, Calif. office.“As you get closer to the east—El Monte, West Covina, Covina—there are huge increases in vacancies in those areas [6.8 percent, 5.8 percent and 5.5 percent, respectively]. They are demographically the working class, and there’s a lot of pressure from the Inland Empire, which for so many years was employing so much of the workforce and that’s no longer there,” Withers explains.According to Marcus & Millichap’s Submarket Report, First Half 2009, the West San Gabriel Valley Submarket achieved small rent gains; asking rents increased 2 percent, while effective rents rose 0.6 percent. Concessions are currently at approximately half a month free rent. The report suggests that asking rents are projected to contract 0.7 percent, with effective rents declining 1.2 percent, this year.Asking rents in the east remained flat year-over-year, with effective rents decreasing 0.8 percent. Both asking and effective rents are projected to decline by the end of the year by 1 percent and 1.4 percent, respectively.Meanwhile, vacancy in the Western Valley increased 240 basis points, to 5.8 percent and is expected to reach 5.9 by the end of the year. At the same time, vacancy rates in the East San Gabriel Valley have increased 310 basis points, to 6.5 percent, during the 12 months ending in the first quarter, with 200 basis points in the first three months of this year. Marcus & Millichap is predicting that vacancy will increase to 6.7 by year-end.In the Western Valley, sales velocity has declined about 31 percent but continues to be strongest along commuter routes near Pasadena and Glendale. “In a downturn, location is everything,” Withers tells MHN. “I’d say right now people are looking at A and B locations, as close to downtown LA as possible, wherever jobs are at. That’s why I think the Western [Valley] is outperforming the Eastern [Valley]. It’s closer to jobs.”The Western Valley submarket has seen a price gain of 0.9 percent for rental properties. Cap rates have averaged in the high-5 to low-6 percent cap rate during the last year, though in 2009, the rate has risen to the low-7 percent range. In the east, investors are looking at smaller properties; 60 percent of the deals closed in the last year were communities of 10 or fewer units. Prices have declined 2 percent over the past year. Year-to-date, cap rates have risen to the high-6 to low-7 percent range.“If you’re a long-term investor, real estate always outperforms,” Withers notes. “When financing comes back to markets and banks get things in line they will be able to refinance and move forward. If you’re a long-term player, there’s no reason not to invest right now.”Because of the metro’s employment diversification, Withers predicts that the region will bounce back faster than many other metro areas in the nation. He states that a clear indication that the market has hit bottom and is beginning to return will come when loans come due.“There are a lot of CMBS loans coming due that will affect southern California. When the loans start coming due, and there isn’t money on the financial level and the dollars aren’t there to refinance, there will be a spiral effect on the downturn. Once it clears out, we should start seeing a more stable market,” Withers tells MHN.Another issue that those in the metro, as well as all owners and investors in the state, need to consider is “how budgets are set up. LA and California as a whole is struggling right now on a budget standpoint,” notes Withers. “As they pull back on certain things, how is that going to impact an apartment owner? I think those are questions that my clients are asking. If you’re in a standalone city not tied to LA, how is the municipality going to handle today’s environment?”Click here for last week’s Market Snapshot on Portland, Ore.