Crunch Coming for Renters? : Apartment Demand Is Growing Along With Economy : WILLIAM H. KRAUS

About 42% of Orange County residents live in apartments, and that percentage is likely to get larger as home ownership becomes an increasingly expensive proposition.

While renters may have a hard time believing it, landlords say rents haven’t gone up much in the last few years. By contrast, the cost of buying a new home has sometimes jumped $10,000 in a single month.

With some of the most expensive housing in the country, Orange County has a problem: Many of the people who filled the hundreds of thousands of jobs created here in the last 2 decades can’t afford a home here.

Those people must either move to places like neighboring Riverside County, where they can afford a house but face a long commute, or they must rent here in Orange County. But now the apartment market may also be facing a squeeze, say experts, as fewer apartments are constructed.

William H. Kraus has spent a good bit of time thinking about this problem as executive vice president of the Apartment Assn. of Orange County, the trade association for the county’s $3-billion apartment industry.

Kraus, 49, has observed the industry from both sides of the fence: For 20 years he was a city manager in some of the county’s smaller cities. For the last 5 years he has run the association from its Garden Grove offices, in addition to teaching management part time at Cal State Long Beach.

In this conversation with Times staff writer Michael Flagg, Kraus lays out the industry’s view on the impending apartment crunch and explains why he differs with some local housing consultants, who think rents will go through the roof in the next few years.

Q. Why are you predicting a shortage of apartments in the near future?

A We’ve rapidly changed from the suburban community of 25 years ago to a place with an economic vitality of its own. As more and more people are employed in Orange County, and as it gets more difficult commuting into the county from places where housing is less expensive, there will be more employees wanting to reside within a reasonable time and distance of their jobs, and many of those people will want rental housing. With 42% of our residents now living in apartments, we’d project that as long as the economy continues to be vibrant the demand for apartments will be strong and that percentage will grow. And we project that Orange County’s economy will continue to expand.

Q. Apartment vacancies are already fairly low now. Why?

A The vacancy rate for a number of years in Orange County was literally “nil vacancy,” which meant that it was slightly less than 2%. Shortly after the passage of the 1986 federal tax reform bill, there was an acceleration in the building of apartments to get under the wire of the deadline: Dec. 31, 1986. (Tax reform took away many of the tax advantages of owning apartments.) So we had something like 17,000 new units come on the market in 1987, which skewed the vacancy rate. Plus low interest rates helped first-time home buyers to buy their first house or condominium and get out of apartments. Our vacancy rate jumped up to around 4.3% in early 1988. But we’re now seeing it go down to slightly under 4% as the absorption of all those units increases. The vacancy rate will probably go down to 2.5% because absorption seems to be accelerating.

Q. Is all this unusual? What’s considered a normal vacancy rate?

A It’s not so much the vacancy rate that’s the question, it’s how long a unit is vacant. Owners and managers are more concerned about the longevity of vacancy. But at least 5% to 6% is an acceptable vacancy rate to the industry.

Q. What about the length of vacancies? What’s acceptable, and where is the market now?

A. Most owners and managers would like to see a vacancy filled within 30 days. In early 1988 and much of 1987 the softness in the market meant units lay vacant up to 60 days. Now we’ve seen it come down very close to the 30-day point.

Q. If the market is going to be so tight, why aren’t developers building a lot of units in anticipation of that?

A. Cost. The cost of land and government fees have made apartments extremely expensive to construct in Orange County, just like single-family homes. And Orange County land has become extremely valuable because of high demand. The second factor is regulation; there’s still a hesitancy among certain cities to include multiple housing within their housing plans. So the amount of land zoned for buildings larger than single-family homes is very scarce, and the scarcity creates more cost. There is not a great desire in many of the cities in Orange County to extensively expand their non-single-family housing base.

Q.Isn’t there a certain amount of racial and class prejudice inherent in that attitude? A. Well, one could hypothesize that. But I like to think there’s more of a prejudice against renting itself: The feeling that a tenant is a transient, that transient residents must create a lack of identity and roots within the community, the feeling that transients create more police problems and that tenants don’t bear their share of the tax burden in a community, which is not true. When you figure that by the turn of the century half the population of the state will not be homeowners, you’re talking about a rather significant number of people who’ll have to face these biases and roadblocks. Q.There seem to be fewer incidences of people protesting new apartment construction in their community. Is that just because fewer apartment complexes are going up now, or has there been a change in attitude? A. It’s a combination. There’s been alot of in-fill development, where in a city like Anaheim you may have had an older four-unit building that’s been replaced with, say, a 16-unit. There’s less opposition to building in a place where there were already apartments. In places where totally new construction is happening--and most of the new apartment construction is occurring in the south county--it’s a part of the master plan of many of those communities. Q.How high are rents now? A.Rents have stabilized in the last couple of years, primarily because of the vacancy problem. Ballpark figures, a one-bedroom unit may go anywhere from $400 a month to $1,100, depending on the location. A two-bedroom can go from $450 to $1,200. The three-bedroom goes from $575 to $1,500. The median would be somewhere between $600 and $800 a month. Q.Would you expect that to be considerably higher in the next few years? A.No, because at this point it’s directly related to inflation and the cost of living. If we see a major surge in inflation, sure, housing will be one of the major areas in which it’s felt. But we see rents being stabilized fairly well now simply because of the affordability issue. How many people can afford $1,200 a month rent? Q.You’ve said before that rent control could become an issue, as it did when Westminster had controls on mobile home rents a few years ago until it was defeated at the polls, or as San Juan Capistrano does now. Do you see more rent control in the county’s future? A.It comes and goes. Rent control here generally becomes an issue only among a small group, when the rents of their apartments or mobile homes have made a sudden tremendous surge. An owner may have kept rents significantly low, sold the building, and the new owner is faced with a new tax and a mortgage and consequently has to raise the rents to match his expenditures. Since rents have been stabilized by and large in Orange County, there has not been a great hue and cry for rent control. And there’s also a feeling on the part of many people in Orange County that freedom of investment, the freedom to own and manage property, should not be preempted by government. Q.With the prospect of most apartment complexes full of tenants, are there still a lot of investors out there seeking apartment complexes to buy in Orange County? A.If you were to talk to any realtor who represents investors, the one big complaint they have is that there’s nothing for them to buy. Nobody is selling. The list of people bullish on buying apartments--whether it’s a four-unit building or a 400-unit complex--is long. We have seen pension funds and other types of institutions, and also a significant increase in Pacific Basin money, primarily Taiwanese money. And we anticipate more Hong Kong money before 1998, when Hong Kong reverts to mainland China. Q. You mentioned tax reform earlier. How big an impact on apartment construction in the county did federal tax reform have? A. Not as much as it did in other areas of the country, where projects were put together specifically with a negative cash flow, primarily because of the tax savings. You bought a complex and you weren’t assuming you’d receive a lot of cash flow from it, but you were expecting to see a significant tax saving and hope the appreciation of the project would ultimately be your reward. But in California most projects have been on positive cash flow. While there have been tax-advantage factors, most projects could stand on their own without them. So the impact was far less. Q. Speaking of high costs, what does it cost to build an apartment in the county and what does that translate into in terms of rent? A.The last figure I heard--including land, construction, financing and other costs--ranged somewhere between $60 and $70 a square foot, which means at least $600 to $700 a month rent. And that’s before adding in the owner’s profits and the cost of management, taxes and maintenance. The profit margin on apartments today is probably not much more than what you could get by putting your money in the bank. So people who invest in apartments are not assuming the profit margin is based on income versus expenditure in 1988, but on the fact that they know Orange County property values and they buy for what it’ll be worth 5 to 10 years from now. Q.Proposition 95, the homeless initiative on the Nov. 8 ballot, would raise money to help the homeless by fining unsanitary restaurants and groceries and landlords who don’t keep their buildings up to code. What’s your association’s position? A.We oppose it, not because we have hard hearts but because when you single out two populations to solve a major social problem, that’s unfair. To fine only that small minority of landlords who do not maintain their property correctly for a very key and very important social issue won’t work. We’re willing to pay, but we want to pay with everyone. Q. Why would fining slumlords bother you, since the fair-and-square landlords wouldn’t be affected? A.Unfortunately, like many ballot propositions, the definition of what’s fair and square has not been made clear in this one. It specifically encourages a tenant who has a problem with an owner to report the owner on violations that may or may not be legitimate. Q.Should there be tougher sanctions on slumlords in Orange County? A. We strongly urge that all our owners maintain property in a legal, proper, appropriate way. Q. Do they? A. No, not all do. We would estimate there’s a small handful of landlords and a small handful of tenants that give a bad name to both sides. We have to define and separate the “malicious” slumlord from the landlord or owner who finds a deliberate effort to tear up the property by tenants the minute corrections are made. But we have absolutely no patience for the traditional slumlord, or for the tenant who will not maintain property. Q.You’ve said the percentage of people renting as opposed to owning a house is going to get larger, not just in the county but across the state. If the American dream is largely concerned with home ownership, is that growing percentage of renters a bad sign? A. I don’t know if I’d put a value on it.We strongly believe in home ownership. But the important thing is that while people are attempting to reach the American dream, they shouldn’t have to settle for second-best. There should be decent housing available to them. There is also a certain segment of the population that looks for rentals rather than homeownership because they don’t like waking up at 3 in the morning with the hot water heater out; they like the maintenance and responsibility to be in someone else’s hands. Q.Leaving aside the question of home ownership, what about the poor? Are we ever going to figure out a way the poor can afford housing without having to cram too many people into a substandard apartment? A.That’s a key concern for us. It’s got to be through underwriting rents, through the department of Housing and Urban Development or some other mechanism like that because the private investor cannot build housing today with the kind of rents that would make it affordable to the poor. You can’t build it, no matter how you design it, unless you build an apartment 20 feet by 20 feet. There is still some federal assistance, such as the Section 8 program, but not as much as there was in its heyday. It’s something the counties and cities can’t afford to do; the federal government is the only one with the resources to do it. Q.What’s the association’s stand on housing for the poor? What are you doing about that issue? A. The local association has not really taken a stand, politically or legislatively. Our national and state associations have taken positions urging there be more federal assistance to provide adequate housing. We haven’t done that in Orange County. Q.Why? Is your membership too conservative to espouse federal assistance, even though it might be good for business? A.No. It just really has not been a local issue at this point. I think many people so far have responded through the marketplace by turning to commuting from neighboring counties, where rents are less expensive. Q For people who can afford an apartment, is discrimination by race--or even against tenants with children--still a problem in the apartment market? A Discrimination of any nature is totally in violation of the law and we don’t even consider any deviation. Our primary effort has been educating our membership on fair housing concepts. We haven’t seen a great mass of complaints. We do find more a lack of clarity in some guidelines, particularly regarding children. I don’t think there’s a lot of discrimination out there. I haven’t been apprised of a large amount.