Bunker Hill Towers Deal May Be a Sign of Higher Rents

Downtown Los Angeles’ glitzy but financially struggling high-rise apartment complexes have become the target of real estate investors gambling that rents will rise as the real estate market recovers.

The latest buyer is Palo Alto-based Essex Property Trust Inc., which this week acquired the 19-story Bunker Hill Towers, downtown L.A.’s first high-rise apartment complex, from a Hong Kong partnership for $36.5 million. The 456-unit structure on South Figueroa Street that opened in 1968 caters to a mix of young professionals with its lighted tennis courts, gym and swimming pool.

It is nearly full of tenants, but, like the handful of other downtown high-rise apartments, Bunker Hill Towers has failed to live up to its original promise of wealthy singles and empty-nesters paying luxury rents to live like Manhattanites. Instead, during the recent slump, many downtown units were rented to University of Southern California students on a budget, downtown watchers say.

Indeed, with average rents ranging from $750 to $1,300, Bunker Hill Towers and its neighboring high-rises are some of the least sought after and therefore most affordable high-rises on the West Coast, said Keith Guericke, Essex president.

A similar property Essex owns in San Francisco, he said, rents units for almost three times as much. He predicts that downtown L.A. apartments will grow competitive as the surrounding office market tightens up and new attractions such as the arena and Disney’s concert hall near completion.

“As the economy heats up, the traffic on the freeway gets worse and worse. So living close to where you work is more attractive,” he said. But downtown apartment investing is not without risk. To make the deal profitable, Guericke said, rents will have to rise at least 5% during the next two years, an estimate he feels comfortable with.

Across the country, analysts say an increasing number of speculators and developers are investing in urban projects as the number of households without children grows.

“High-rise living is becoming more attractive for those households. People are fed up with long commutes and are looking for more cultural opportunities,” said Jack Goodman, chief economist for the National Multi-Housing Council in Washington, D.C.

In Los Angeles, only a few investors so far have actually begun to scout the district’s 4,000 apartment units, trying to snap up some properties before competition gets more intense.

For example, a joint venture formed by SSR Realty Advisors and California Public Employees’ Retirement System recently scooped up the Renaissance Towers on West Olympic Boulevard. The 192-unit complex sold for $18 million, an estimated 45% of what it would cost to replace it.

Likewise, Essex snapped up Bunker Hill Towers for about half of what it would cost to build.

But real estate observers say these will prove to be bargains only if demand pushes rents up. That’s not something that is likely to happen overnight, brokers say.

“I think everybody has always hoped that downtown L.A. will turn into a cosmopolitan 24-hour city,” said broker Marc Renard, with the downtown office of Cushman & Wakefield. “But [for that to happen] we’re not talking a year or two, more like five or 10,” he said.