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Luxury apartments to test renters’ confidence

For its coming out party, the Sunset Vine Tower threw a glitzy bash worthy of a Hollywood opening, complete with free food, booze and live music.
Monthly rent at the new Sunset Vine Tower in Los Angles will be range from $2,375 to $14,000 a month.Damian Dovarganes / AP
/ Source: The Associated Press

For its coming out party, the Sunset Vine Tower threw a glitzy bash worthy of a Hollywood opening, complete with free food, booze and live music.

Revelers packed the 20-story complex's unfinished penthouse and toured a few furnished apartments, including one with a unique, if temporary, decoration — a young woman taking a bubble bath.

Developer CIM Group is banking that prospective tenants will be wooed by more luxurious features — such as panoramic views of the city and landmarks like the Hollywood sign, designer kitchen and bathroom fixtures, and concierge service. The price tag: between $2,375 and $14,000 a month.

One might question whether this is the best time for developers to roll out the red carpet on luxury apartment buildings. Unemployment remains at near 10 percent nationally. Vacancy rates for apartments have been rising and landlords have had to lower rents.

But that's not dissuading new luxury apartment complexes from opening doors in Los Angeles, New York, Miami and elsewhere. In many cases, the projects were conceived years ago before the housing bubble burst. Some, like Sunset Vine Tower, were initially envisioned as condos.

Now those owners are hoping that even in tough economic times, renters will choose to pay a premium for fancier digs.

So far, it's too early to tell, but tenants generally have the upper hand. Falling home prices, low mortgage interest rates and government tax incentives have led many renters to make the jump to homeownership. Others have taken roommates or move with relatives as the job market has worsened. And that's left buildings riddled with empty apartments.

Finding tenants may be a stretch in markets like L.A., for example, where several apartment buildings are scheduled to open this year.

Still, CIM Group principal John Given expects the Sunset Vine Tower will find a market among people who work in show business or would otherwise find the building's amenities and location too good to pass up, regardless of the price tag.

"It is something that our target market has the discretion to be able to rent," Given said.

So far, 10 percent of its 63 apartments have been leased, Given said.

Buildings that fall into the luxury category are typically less than a decade old, feature high-end amenities similar to hotels such as concierge service, security or spas and can command higher than average market rents. But they've not been spared the fallout from the economic and housing market woes.

The vacancy rate for luxury rentals nationally hit 8.2 percent last year, up 1 percentage point from the prior year, according to Reis Inc. Asking rents fell 3 percent to $1,186. The firm's analysis excluded buildings with fewer than 40 apartments and condos rented out by their owners.

Some signs began to emerge in the last three months of 2009 that vacancies have begun to stabilize, said Hessam Nadji, managing director of Marcus & Millichap Real Estate Investment Services. Still, a turnaround isn't likely to pick up steam before next year.

"We're not in an economic recovery yet, particularly in the L.A. market," Nadji said.

In Los Angeles, the vacancy rate for high-end apartments climbed annually from 4.2 percent in four years ago to 6.5 percent in 2008, according to Reis. It was essentially flat last year, but landlords had to slash rents about 5 percent from 2008 levels to around $1,833.

In New York, the financial industry has been staging a turnaround of its own since the crisis hit in the fall of 2008 and a wave of layoffs swept the industry. The stock market has rallied and Wall Street bonuses have made a comeback — all good news for the luxury housing market.

Rents in Manhattan are weaker than they've been in previous years, but vacancies are low, particularly for larger apartments, says Yuval Greenblatt, executive vice president of real estate firm Prudential Douglas Elliman.

Rents began to stabilize in the last three months of 2009 and fewer listings were available than in the same period the year before. The firm estimates the median rental price fell more than 9 percent in the fourth quarter of 2009 to $3,200.

Several developers have forged ahead with high-end apartment projects.

One phase of a planned five-building apartment complex on Manhattan's upper west side dubbed 808 Columbus Square has seen nearly a dozen of the more than 30 penthouse-level, two-bedroom residences rent for $10,000 a month, Greenblatt said.

In all, more than two thirds of the building's 359 apartments have been leased. A second building is roughly 55 percent leased.

In Miami, apartment building owners are competing against a flood of condos, a byproduct of overbuilding during the housing boom.

"In South Florida, anything that had 10 units or more was converted into a condo," said Peter Zalewski, a Miami-based real estate agent.

Many smaller buildings that were originally rentals and were converted into condos are having a tough time getting leased. But the high-end complexes are faring much better.

Vacancies have been rising the past four years and hit a rate of 6.6 percent last year. Asking rents have been sinking, falling about 4 percent last year alone. Construction has been at a near standstill.

Robert Lechter hasn't had any trouble finding tenants for a building near a row of luxury condos near Downtown Miami.

Lechter is part of a group of investors that purchased a 12-story condominium from a bank last August for about $10 million and opened it as a rental property in November. Just four months later, only one of its 63 units remains empty, Lechter said.

While not as fancy as some of its neighbors, the building's loft apartments, some with 300 square-foot terraces, have been a selling point for tenants paying anywhere from $1,400 to $2,000 a month.

When the housing market improves, however, Lechter says it may make more sense to sell.

"Our exit strategy is probably going to be a condo conversion three or four years down the road," Lechter said.