The median rises 17% to $414,000 in January, the smallest year-over-year gain since June 2003. Slowdown may not last.
By Annette Haddad
Times Staff Writer

February 10, 2005

For the first time in 19 months, the year-over-year rate of housing appreciation in Los Angeles County has dropped below 20%, statistics released Wednesday showed.

The median price in the county in January rose 17% to $414,000, according to DataQuick Information Systems, a La Jolla real estate research firm.

It was the slimmest increase since June 2003, putting the county’s median price where it stood seven months ago, after hitting an all-time high in December at $418,000. The median is the point at which half of new and resold homes and condos sold for more, half for less.

The January numbers don’t necessarily suggest that prices have finally hit a plateau.

“We’re in for a slower rate of appreciation,” said John Karevoll, DataQuick’s chief analyst. He predicted the appreciation rate in L.A. County would be “closer to 10% than 20″ by the end of the year.

“The big question is: Will there be a soft landing?” he said. “Right now, the soft-landing scenario is the most likely as we get appreciation rates back down to sustainable levels.”

The number of homes sold last month fell 5% to 7,633 from a year earlier. That was off the January peak reached in 1989, when 9,615 sales were recorded, but far above the January low of 4,524 in 1992.

Because January historically is among the least active months for buying and selling homes, the statistics may not signal any lasting trend, Karevoll said. DataQuick’s numbers include every recorded escrow closing for the period and reflect transactions that were opened 30 to 60 days before.

Persistently low mortgage rates, a limited supply of dwellings and steady demand are keeping Los Angeles’ housing market humming, albeit at a more measured tempo than last year. (Long-term interest rates sank even further Wednesday, when the benchmark 10-year Treasury note’s yield fell below 4% for the first time since late October.)

A year ago, L.A. was in the midst of a housing whirlwind. Few homes were available for sale, and demand was strong because mortgage rates were at 40-year lows. The activity became so frenzied that prospective buyers were bidding up prices on properties at a pace not seen since the late 1980s.

The flurry continued through the spring. By summer, homeowners wishing to cash out were rushing to plant “for sale” signs. The supply of homes ballooned, giving buyers not only more selection but more opportunity to negotiate the price.

By mid-summer, prices began to soften, a phenomenon that appeared to continue into the fall, said G.U. Krueger, an economist at real estate firm IHP Capital Partners. January’s data seem relatively weaker because they “reflect the deals made six weeks ago or longer — at the tail end of that softening,” Krueger said.

Sensing that the froth was coming off, a growing number of homeowners retreated from the marketplace in recent months, shrinking the supply of for-sale homes.

The California Assn. of Realtors’ unsold inventory index for Los Angeles County, which measures how long it would take to sell all of the homes on the market at the current rate of sales, stood at 2.6 months in December, the latest month available. That was up from 1.1 months in December 2003 but down from August’s 6.1-month supply.

The change in inventory levels suggests that “there are more realistic sellers asking realistic prices, and buyers recognize that,” said Patrick Veling, president of market research firm Real Data Strategies. That phenomenon probably will keep the rate of price appreciation in the low teens by year’s end, he said.

But if inventories remain low, prices could go higher as demand picks up after winter ends.

“When you see a bull market such as this, it generally doesn’t stop and dip,” said Anthony Hsieh, president of LendingTree Inc., a division of IAC Corp. “If there is any momentum, it will go up again. But there’s no guarantee of that.”

“The next major test,” he said, “will be in the spring.”

by Kathryn Maese

The hunger for Downtown housing combined with the specter of increased hotel competition in the area has sparked a unique trend: At least four area hotels are considering converting all or part of their properties into condominiums or apartments. Some would provide residents with traditional hotel amenities like room service.

However a group of labor and government figures are balking at the move, and are taking steps to stop a process they say could cost the city thousands of jobs and hotel rooms. The issue has heated up recently as the City Council’s Planning and Land Use Committee is studying a plan to implement a six-month moratorium on all such conversions. A vote is expected in the coming weeks.

Among the hotels considering the switch to housing are the 188-room Hilton Checkers at 535 S. Grand Ave., the 1,400-room Westin Bonaventure at 404 S. Figueroa St., the 205-room Holiday Inn at 750 Garland Ave., and the 300-room Best Western Mayfair at 1256 W. Seventh St. The Hyatt Regency at 711 S. Hope St., which is currently for sale, has also been cited as a candidate. Outside Downtown, the St. Regis in Century City and the Furama Hotel near Los Angeles International Airport are both turning to condos.

Though the trend has taken root in Boston, Manhattan and the South Beach section of Miami, Los Angeles has come late to the game. Real estate experts predict interest will increase as aging or rundown hotels are targeted for development, and as hotel owners seek to shore up lagging convention and tourism business by converting a portion of their rooms.

“It’s sparking people’s interest because we’re in the middle of a condo upswing,” said Benjamin Reznik, a land use attorney whose firm Jeffrey, Mangles, Butler & Marmaro will host a condo-hotel conference in Palm Springs next month. “There’s an appetite in Los Angeles and a high demand to try and ride that wave. These will largely appeal to a combination of corporate clients who don’t come into town frequently or people who just see this as a good investment.”

Reznik said a moratorium on further conversions would be unwarranted. “There is no crisis here in the city,” Reznik said. “Converting them makes more economic sense and will enhance the city’s economic interest.”

Carol Schatz, president and chief executive of the Central City Association and the Downtown Center Business Improvement District, said the city should be concerned not just about the loss of union jobs, but overall economic growth.

“When you adaptively reuse a hotel, it creates construction jobs, provides jobs for the people who continue to serve residents, creates property taxes and increases the assessed value of the property,” Schatz said. “We’re dealing with a housing supply issue that we have long maintained has been a problem at every level.”

Preparing for Competition

Conversions appeal because of the profit potential. Industry officials say hotel owners can earn 15% to 40% more per square foot than with traditional condos, when combined with built-in amenities such as housekeeping, maintenance and room service. Hotelier Peter Zen said that option could help his 1,400-room Westin Bonaventure hotel.

Zen said he is worried that a proposed 1,200-room Convention Center hotel next to Staples Center would sap business from the Bonaventure and other Downtown hotels. He said that he might convert a portion of the Bonaventure into for-sale housing.

“Business is definitely slow,” Zen said. “We have never exceeded 60% in occupancy, so we are looking at ways to reach an adequate return for our money.”

Chicago-based Falor Companies, which specializes in purchasing existing hotels and converting them to condos, plans to transform the Hilton Checkers by April, according to the company’s website. Falor didn’t return a call for comment.

Most troubling to opponents of the practice are hotels that convert entirely to residential. The condo-hotel trend in New York City has led to a decrease of more than 6,000 regular hotel rooms, according to Daniel Lesser, senior managing director of Cushman & Wakefield’s hospitality group. Entities such as the Plaza, the Mayflower and the Empire have gone completely condo.

In Downtown, the 1960s-era Holiday Inn in City West is leaving the hotel business. Newport Beach-based owner MKT Community Development is turning the six-story structure into 205 studio apartments with plans to open in March.

The concept will be similar to a condo hotel in that the developer is considering providing hotel-like amenities such as room service, a restaurant, a salon and even a bartender who can pour a martini for a resident who’s had a long day. About 85% of the apartments will be priced at $1,200 a month, though some will cost up to $2,000.

“It will have a hybrid hotel and residential complex feel,” said leasing manager Stephen Shapleigh. “We want it to be a place for people on-the-go, or bi-coastal people who fly in to L.A. seven to 10 days a month and don’t want to pay hotel rates. So they can come home and cook a meal as they would be able to do in a residential complex.”

The Mayfair hotel on Figueroa Street will be converted into traditional condos. Craig Lawson, a land use consultant at Craig Lawson & Co., is moving forward with the entitlement package.

“We’ve seen several cases in which older hotel buildings are being proposed for conversion to residential units,” Lawson said. “It’s only being considered by those hotels that aren’t renting enough rooms to make it financially viable.”

Jobs and Tax Revenue

Critics see a different reality. Councilman Martin Ludlow, who proposed the moratorium, has said the plan would cost the city 2,000 hotel rooms - or 5% of the total stock - in addition to 1,000 jobs and revenue generated from the 14% hotel bed tax.

The Los Angeles Alliance for a New Economy (LAANE), which opposes the conversions, said the rebounding tourism industry is becoming strong enough to sustain hotels and jobs as it returns to peak 2000 levels.

“The City Council is talking about spending a fair amount of money to support a Convention Center hotel,” said James Elmendorf, a senior policy analyst for LAANE. “So there’s a recognition that we need more hotel rooms to attract and build tourism. When you lose hotel rooms, you go backward. You’re also talking about losing $8-$10 million in annual tax revenue, which means fewer funds for services.”

Councilman Ed Reyes, who chairs the PLUM Committee, said he expects a report from the city’s Chief Legislative Analyst and the City Administrative Officer by late next month detailing the impact of the trend on city coffers, tourism and legal issues.

“On the one hand we want to ask how do we preserve property rights while preserving hotels,” Reyes said. “Whether this is an overreaction is the question we want to find out. But as you start peeling back the onion, things get more complicated.”