Living in the aftermath

In October 2007 as the Southern California apartment market continued its cooling trend, much of the Southland burned. At least 10 wildfires from Northern Los Angeles County to San Diego whipped through the area, fueled by the seasonal Santa Ana winds that come off the desert. The blazes finally were extinguished on November 9, leaving 500,000 acres of land scorched, nine people dead and 85 injured, including 61 firefighters. Around 2,000 homes were either destroyed or damaged by the flames and nearly 250,000 people were forced to evacuate their homes.

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The cause of several of the wildfires in San Diego likely was power line sparks and/or power lines downed by high-winds, but an investigation still is underway. One fire was started when a semi- truck overturned, another, the Buckweed fire in Aqua Dulce was caused accidentally by a 10-year boy playing with matches. Another is suspected to have been deliberately set by a man, who later was shot and killed by state police.

The wildfires were the second big disaster this year for San Diego’s apartment market, which already was struggling with a glut of unsold for-sale housing and a softening local economy due to job losses in the mortgage industry and a slowdown in construction employment. But, except for clean-up efforts that now are in progress, most large apartment operators escaped with little more than smoke damage and a lot of clean up work to be done.

West Coast-centric BRE Properties began to see a marked improvement in its San Diego portfolio just before the fires. “Market rents were up 3.5 percent from the second quarter and occupancy was around 96 percent,” said CEO Connie Moore, noting that the REIT only had about 60 vacant units across its 3,712-unit, same-store San Diego portfolio. “We have seen no increase in occupancy since the fires, but job growth is up and troop rotations back to San Diego help to support the market,” said Moore.

All BRE’s San Diego assets are back online since the fire, but like most apartment owners in the area, the REIT sees a significant clean- up job ahead. “We don’t know what those clean-up costs will be, but it’s hard to believe they’ll be much more than a penny (in the REIT’s FFO guidance). But there’s an awful lot of ash and soot, in some cases two to three feet sitting in some of the swimming pools. It probably won’t be a monumental expense, but enough of one for us to accrue for it at the end of the year,” said BRE Chief Operating Officer Ed Lange.

Essex Property Trust is another REIT that expects to see an increase in property repairs and maintenance expense this quarter as a result of clean-up activities across the REIT’s 2,616-unit, same-store San Diego portfolio.

But Essex CEO Keith Guericke thinks apartment occupancy in the region might improve as a short-term effect. Discussing the wildfires and their impact on apartment markets, primarily San Diego, in the REIT’s Q3 conference call, he pointed out that a large number of the homes that were destroyed or damaged there were newer homes with prices well above the county’s median value. “Several hundred non-residential buildings also were destroyed or damaged, although infrastructure damage was minimal. In the short run, some of the evacuees will join the rental pool and relief aid from federal and state governments, as well as private insurance, will support reconstruction. Rebuilding of the homes obviously will take a little bit of time. It’s a slow process. The net result is that we have not altered our outlook on the economy or the strength of the apartment market in San Diego in the short run or the long run,” he said.

UDR, Inc., which owns 1,123 units in San Diego County, already is seeing occupancy improve. “We continue to have pricing power in our Western markets and some strengthening in occupancy in the San Diego market as displaced homeowners and construction workers seek rental housing during the clean-up and rebuilding process. Several of our assets were in close proximity to the fires and two were evacuated. We experienced smoke damage at one property and ash across the area, but do not expect significant costs associated with the fires,” said former UDR Executive Vice President of Property Management Martha Carlin in the REIT’s Q3 earnings call, just before she resigned to take advantage of a new opportunity. The Irvine Company, Orange County’s largest owner of apartment communities, reported that only two of its assets in the northern part of Irvine were affected by the wildfires and voluntarily evacuated–the 357-unit Portola Place and the 500-unit Orchard Hills,– which is under construction.

“We were very fortunate that none of our properties were damaged during the fires. The fact that our properties were spared is a testament not only to the dedication of the Orange County Fire Authority, but also to the effectiveness of measures that have been taken to prevent wildfires from reaching developments. These steps include reducing combustible vegetation along the outside perimeters to make sure structures in at-risk areas are fire resistant,” said Bill Rams, spokesman for the Irvine Company, which also owns six apartment communities and six high-rise office buildings in downtown San Diego, as well as several other office properties in San Diego suburbs.

Moran & Company President Mary Ann King believes the biggest negative impact of the fires on Southern California apartment owners may come in the form of increased insurance rates.