Market View
by Jay Greenberg
The San Francisco apartment market has changed and the second quarter numbers reported here are not yet telling the story. The rental market is hot again and owners should take advantage of this cycle while they can. Tenancies-in-common (TICs) and condo conversions continue to nibble away at the apartment stock with minimal new units being constructed. Plus, uncertainty in world events and interest rates has economists guessing about the future.
The following are second quarter statistics for the 5-9-unit sector versus the same time period for 2005. The average price per sq. ft. has increased from approximately $266 a foot in 2005 to approximately $313 a foot in 2006. Gross rent multipliers (GRMs) have increased from approximately 17.20 times gross in 2005 to 18.53 times gross in 2006, and the cost per unit has also risen from approximately $266,000 in 2005 to approximately $276,000 per unit in 2006. Dollar volume for the 5-9-unit sector in 2005 was approximately $102 million, versus approximately $70 million in 2006. The number of transactions in 2005 was approximately 63, versus approximately 45 in 2006.
For the 10-plus-unit sector in the same time period, the average price per sq. ft. has increased from approximately $266 a foot in 2005 to approximately $323 a foot in 2006.
GRMs have risen from approximately 13.74 in 2005 to approximately 14.11 in 2006, and the cost per unit has risen from approximately $209,000 per unit in 2005 to approximately $240,000 per unit in 2006. The rise of 17% in the cost per sq. ft. indicator is amazing. There have been several recent high-end apartment sales in Pacific Heights and new construction, non-rent-controlled buildings in the SOMA area that have affected this indicator for this second quarter report. For example, one SOMA building sold for $1,000-plus per sq. ft. Dollar volume for the 10-plus-unit sector in 2005 was approximately $120 million, versus approximately $206 million in 2006. The number of transactions in 2005 was approximately 33, versus approximately 42 in 2006. The sources of the numbers reported are from Marcus & Millichap Research Department, San Francisco Multiple Listing Service and CoStar Comps.
The numbers reported above show a 31% decline in the dollar volume of sold properties in the 5-9-unit sector, with a decline of 29% in the number of transactions. On the other hand, in the 10-plus-unit sector we see a 41% increase in dollar volume and a 21% increase in the number of transactions.
In my opinion, the numbers of the 5-9-unit sector are more reflective of what is happening in the market. I believe before the year is over we will see similar declines in the 10-plus-unit sector. The market has definitely changed. Buildings that would have sold a year ago are sitting on the market without offers and without much activity regarding calls and showings. I have recently seen some properties offered for sale, which I thought would have received multiple offers and ultimately sell over the asking price, only to learn that two months later the property had received no offers. There is increased inventory in both sectors of the market with increased price reductions and a larger number of properties withdrawn from the MLS. Also, the number of days on the market to sell properties is increasing. It is a difficult time for agents pricing properties because we typically look back twelve months for comparable sales when pricing a property. Properties that sold at last year’s levels are not selling now.
For the last few years one buyer has completely dominated the 10-plus-unit market. During this period of time we saw rapid appreciation and fierce competition for properties. The majority of the time, the fierce competition was won by this dominating buyer. Now, this dominating buying force is offering a large number of buildings for sale. It will be interesting to see the short-term and long-term effect of this phenomenon on the San Francisco apartment market and surrounding markets. It’s almost like taking Michael Jordan out of the Chicago Bulls lineup; it will eventually impact the final score and the team record.
On the other side of the apartment business, the rental market is hot again. Many owners are reporting a high volume of renters and callers for all advertised units. I talk with apartment owners daily about all aspects of ownership, including rentals. I have recently rented my own units at rent levels that I would not have thought possible a few months ago. If you have any vacancies coming up, now is the time to push on the asking rent. If you advertise a unit for rent and receive 40 calls, it is time to raise the rent. During the past five years all owners have made money because of the escalating value indicators in the market. Continuing appreciation on your buildings during this time of rising interest rates will come from increasing rentals and net operating income. The summertime is an excellent season for rentals and hopefully the market will continue past the summer months and through the end of the year. Many would-be buyers have been priced out of the purchase market due to rising interest rates and current pricing levels. Take advantage of the cycles that occur in our rental markets as you would in the sales markets if you want your property to continue appreciating.
I have recently had my eyes opened to the high-end rental market in San Francisco. These are units that are renting for over $5,000 a month. In recent conversations with different rental agents, I was quite surprised to find out that there is a vibrant market for renters looking for units at this level and above. Agents told me about rentals above $10,000 to $15,000 a month.
I believe another factor affecting our rental market today and into the future is the growing popularity of TIC units for sale. Over the past few years we have seen increasing numbers of units converted from rentals to owner-occupied units. Meanwhile there have been very low numbers of new rental units being built in San Francisco. High land costs have forced developers into the condominium market and out of apartment development. Several lenders are funding individual loans to individual buyers, dramatically increasing the popularity of these units to the public. I am currently aware of four different lending sources for individual TIC loans. When (I believe it is only a matter of time) some larger lenders enter into this market we will see dramatic changes to the entire landscape of San Francisco. This type of unit is currently very popular in the higher-end neighborhoods of the city. In the second- and third-tier locations, sales of this type of unit seem to be suffering. The best rates and loan programs are going to the better-located properties and many of the units are selling with higher-than-expected down payments.
Interest rates have been the primary factor driving the real-estate boom in the United States for the past five years. Interest rates have been slowly and steadily rising for the past two years. Last year at this time you could have secured a seven-year fixed rate of 5.03% and today the seven-year fixed rate is 6.6%. There is currently a lot of uncertainty in the world, with numerous conflicts in the Middle East and oil prices hitting record highs. Federal Reserve Chairman Ben S. Bernanke’s congressional testimony accentuated a split among economists about where interest rates are headed in the near term. The chairman, in his semiannual report to Congress, dodged specific questions on the policy outlook. The biggest unknown on Wall Street and at the Central Bank is the impact a cooling housing market will have on consumer confidence and spending.
| Partial List of Sales During the Second Quarter:
San Francisco Apartment Sales |
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| Unit | Sales Price | Units | Sq. Ft. |
| 49-55 Columbus Ave. | $1,500,000 | 22 | 24,993 |
| 2659 California St. | $4,800,000 | 16 | 18,980 |
| 501 Grove St. | $1,900,000 | 10 | 5,134 |
| 350 Laguna St. | $3,280,000 | 21 | 12,000 |
| 784 Geary St. | $1,800,000 | 12 | 10,997 |
| 643 Webster St. | $1,527,000 | 10 | 5,810 |
| 1301 Fell St. | $1,700,000 | 12 | 7,500 |
| 740 Monterey Blvd. | $3,980,000 | 24 | 17,646 |
| 2886 16th St. | $1,900,000 | 13 | 8,640 |
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Jay Greenberg is a real-estate broker with Marcus & Millichap and can be reached at 415-625-2115. Copyright © 2006 by the San Francisco Apartment Magazine. All rights reserved.