When is a rehab not a rehab?

When is a rehab not really a rehab?

Here are some pics of a deal on Alvarado, a duplex we’re changing into a 4plex. As you’ll see, the only thing separating this “rehab” from a ground-up project is, well, a door-frame.

On 7/28, after we bought it:

132 N Alvarado - 7/28

On 9/17, mid demo:132 N Alvarado - 9/17

On 10/29, as the foundation is being poured (note the door still standing, making this a “rehab” project):

132 N Alvarado - 10/29

Why the rent is so damn high

Someone asked me yesterday why the rent in LA is so damn high.

Figured it would make an interesting post for the blog, so here goes:

Demand for close-in apartments in all major cities is growing due to:

  1. Demographics, eg more people in the prime rental age range of, says, 22-35; and
  2. A society-wide shift in preferences in favor of urban living at the expense of suburban / exurban living.

In a normal apartment market (eg not LA), this increased demand would result in:

  1. Small increases in the rent of every apartment, as landlords seek to benefit from increased demand
  2. Increased development of new apartments, eventually leading to stabilizing or declining rents

In LA, the above doesn’t happen, or at least not as efficiently.

Because most of LA’s units are covered by rent control, and many of those tenants are paying under-market rents and won’t ever move, the price impact of increases in demand are not spread evenly over the entire market. Instead, they are concentrated in the (relatively) small number of apartments that are actually available to rent (eg those which are vacant or not covered by rent control).

So, asking rents for the apartments available in the spot market shoot up.

In an ordinary city, you would expect those high rents to entice developers to build, eventually increasing supply and thereby moderating or reversing rent growth.

In LA, zoning makes it extremely difficult to build new units, both in terms of the cost of the projects and how long they take. So, the supply side is basically incapable of keeping up with demand, except in cases of severe recession (where demand is “artificially” reduced).

That, my friends, is not a good recipe for keeping housing affordable. But it’s a great recipe for making money if you’re a (smart) landlord.

In defense of micro-units

Just read a fairly irritating article over at Curbed LA regarding “micro-units”, which are generally defined as apartments smaller than 400 sq ft.

The tone of the article is pretty negative. The blogger (whose work I generally like) spends a lot of time emphasizing how small 400 sq ft is.

Micro-units are part of the solution to our housing affordability crisis: Because they use less space but generate high per sq ft rents, developers like to build them. And the actual rents are more affordable than regularly sized units (in other words, they’re more affordable).

Sounds like a win to me.

In fact, if I were king of LA for a day, I’d set aside zones near transit where you could build lots of micro-units with little or no parking. Developers would be happy to build them and the rents would be cheap. The cost, much harder street parking in the neighborhoods, is clearly tolerable in order to get more affordable housing.

Yet another example of city-imposed insanity

Many of you know that LA is in the process of adopting stringent earthquake retrofit rules intended to prevent the collapse of so-called soft-story apartment buildings.

So I thought you’d appreciate this story from the front lines:

We are in the process of renovating a building with a soft-story for a partner.

Here’s a picture of a soft-story building, so you know what I’m talking about. Note that it’s held up by skinny little poles:

Soft-story

The problem with the design above is that, in a strong earthquake, the poles collapse, dropping the apartments above onto the cars.

Knowing the new rules are coming into force (and wanting to protect the building!), we sent an engineer to get plans approved to do the relevant retrofit.

The way you do this is to build one or more strong steel structures called a “moment frames” in the parking area. The frame(s) are anchored right where the painted lines separate the parking spaces, so that people can still park there.

Should be simple, right?

Wrong. The plan checker rejected our proposal, because it reduces the width of the parking spaces by six inches, so that they no longer conform to code.

In other words, the city is about to mandate moment frames of the exact type we are proposing to build and some plan checker is refusing to allow us to build them, because of the impact on parking (which is notional, anyway – the spaces will still be plenty big enough to park in).

Obviously, the plan checker will be over-ruled by a superior. But this will add a few weeks to the project. And we could have avoided the delay simply by not retrofitting.

Total, utter insanity.

Considering crowdfunding

One of our competitors put a deal up on a crowdfunding site recently, so far with not-particularly-good results.

Still, it made me think about whether crowdfunding is right for Adaptive.

We have traditionally had a minimum investment of $100k for our deals. This is mostly for ease of administration… each investor, no matter how small, should get a reasonable amount of “love”, and that’s hard to do at smaller dollar values.

But there are now crowdfunding platforms that promise to make it feasible to service investors putting in much smaller amounts of capital.

I think this might be interesting for us, particularly because of this blog. My theory is that there are probably a lot of people who are reading this right now who couldn’t or wouldn’t do $100k but who would like to do $10k.

Am going to investigate the various platforms and see if this model makes sense for us. Meanwhile, if you have an opinion on this, either way, let me know (moses at adaptiverealty dot com).

Obligatory legalese: This blog post is not an offer or solicitation for any investment opportunity.