Market View
The Lure of Location
by Jay Greenberg
The third quarter produced the most sales activity to date this year and established some momentum and sales comparables for our market, though value indicators, dollar volume and number of transactions continue to decline from 2008 in all categories and sectors. The majority of the third-quarter sales involved lenders as part of the selling entity. The rental market has been difficult all year (by San Francisco standards) with rental rates holding as we approach year end. Interest rates remain at attractive levels and financing for the purchase of San Francisco apartments is available. Even with the upswing in activity that has occurred recently, the brokerage community is bracing for another difficult 12 months ahead.
The following are 2009 year-to-date (through the end of September) statistics for the 5-9-unit sector versus the same time period for 2008 and 2007. I have included the 2007 sales statistics to provide additional perspective to this year’s reported numbers. The average price per sq. ft. has decreased from approximately $376 a foot in 2008 and $333 a foot in 2007 to approximately $272 a foot in 2009. Gross rent multipliers have decreased from approximately 17.09 times gross in 2007 and 16.37 times gross in 2008 to 14.54 times gross in 2009, and the cost per unit has decreased from approximately $298,000 in 2007 and $289,000 in 2008 to approximately $235,000 per unit in 2009.
Dollar volume for the 5-9-unit sector (through the end of September) in 2007 was approximately $199 million and $104 million in 2008 versus approximately $87 million for the same time period in 2009. The number of transactions in 2007 was approximately 113, with 57 sales in 2008 versus approximately 56 in 2009.
For the 10-plus-unit sector in the same time period, the average price per sq. ft. has decreased from approximately $316 a foot in 2007 and $347 a foot in 2008 to approximately $270 a foot in 2009. Gross rent multipliers have decreased from approximately 16.54 in 2007 and 15.34 in 2008 to approximately 11.85 in 2009, and the cost per unit has decreased from approximately $234,000 per unit in 2007 and approximately $268,000 per unit in 2008 to $196,000 in 2009.
Dollar volume for the 10-plus-unit sector in 2007 for the same time period (through the end of the September) was approximately $584 million and $301 million in 2008 versus approximately $102 million in 2009. The number of transactions in 2007 was approximately 97 versus approximately 40 in 2008 and a whopping 32 sales in 2009. The source of the numbers reported is the Marcus & Millichap Research Department, the San Francisco Multiple Listing Service and CoStar Comps.
The Big Picture
This past quarter has produced some positive signs for the San Francisco apartment market. The third quarter produced the most sales activity to date and has established some momentum and sales comparables going forward. The value indicators have all decreased when compared to 2008; however, in the 5-9-unit and 10-plus-unit sectors combined, we have seen some increase in four of the six value indicator categories compared to our second quarter sales statistics this year. The exceptions are GRM for the 10-plus-unit sector, which has dropped significantly from 14.4 GRM for second quarter 2009 to 11.85 GRM for third quarter 2009, and price per unit in the 5-9-unit sector has dropped from $273,000 for second quarter 2009 to $256,000 for third quarter 2009. In both sectors, cost per sq. ft. numbers have risen. Third quarter sales activity has doubled the previous two quarters combined and dollar volume increased tremendously. Most importantly, the sales activity has produced fresh comparables, establishing useful and more predictable pricing levels.
The third-quarter sales were lender dominated. Many of the lender-owned offerings received multiple offers, showing more positive signs that there is increased activity in the market. There has been a recent portfolio of loans secured against 13 San Francisco apartment buildings offered for sale by a local lender that received multiple offers. Many offers came in for the portfolio in the 50- to 60-cent on the dollar range, though offers in this range received no response. At press time, sources from the local lender are stating that the loan pool is not under contract. To purchase a loan portfolio, the buyer needs all cash and no leverage component. Even under this scenario, the loan pool offering received a good response.
It appears that what has been selling in general would be considered A- and B-type locations. There have been a few sales in other lesser locations, but not many. The interest level on the better locations and buildings has been strong. A recent Marcus & Millichap offering for a trophy concrete and steel building located on Buena Vista Park produced seven offers. The building is master metered for gas and electric and has a steam heating system. The expenses in the building are very high compared to other separately metered buildings. This has not swayed investors from the offering. Our sales market is confirming: location, location, location. Even though value indicators have been dropping, in my opinion, value levels have been strong for well-located buildings. We have to remember that our market was artificially inflated by the effect of the subprime market and lack of underwriting taking place a few years ago. If we cut out the period of 2005-2007, we would find that, overall, GRMs have fallen slightly.
Investors have changed their underwriting priorities and seem to be more focused on cap rates than other value indicators. In the past, agents and investors focused on GRMs, price per foot and price per unit numbers. Rarely did we talk about cap rates when valuating properties. The market and world has changed and investors are now more concerned about a flat rental and sales market (or worse) for the next few years. It appears that investors who are active in the market today are willing to accept cap rates below 6% for well-located buildings. For Mid-Market and other bread-and-butter type buildings, investors are looking for cap rates above 6%.
The rental market has been spotty at best all year—by San Francisco standards. Many other rental markets across this country would love to have San Francisco’s bad rental market. In general, rents are down approximately 10%, more or less.
If you have always rented your units far below market, then your rents are not down at all. If you do not have the luxury of renting your units well-below market, then you have probably experienced some turnover and rent reductions. Units above the $3,500 mark have experienced 15%-plus drops in rents. The velocity of renters in the higher end market is very low, and owners and agents report they are having a hard time even generating phone calls for advertised units.
Recently, on Craigslist, there were 570 listings for one-bedroom units in Pacific Heights, the Marina and Cow Hollow. Since early summer, we have been losing people and jobs in the city. For the 60-day period between July 1 and August 31, we lost 6,900 people from the labor force and 5,100 jobs. The unemployment rate for the U.S. reached 10.2% in October, the highest level since 1983, a labor department report showed recently. The most current data available shows California with a 12% unemployment rate for September 2009. I do not believe we have reached the bottom of this cycle yet.
Financing continues to be available for qualified San Francisco apartment investors. Qualified investors are buyers who have the necessary down payment funds available and a quality credit history. The majority of loans are coming from local banks. Qualified investors have to jump through many more hoops than in the past when venturing through the loan process and are receiving funding from local lenders. Most of the five-year fixed-rate money is in the low 6% range and there are still loans available below 6% for low-leverage quality buildings without issues.
The U.S. completed the sale of $81 billion of notes and bonds amid speculation that the Federal Reserve will keep interest rates near record lows for the foreseeable future. We are in the deepest recession since the 1930s and the Fed is saying they are in no hurry to raise rates. The sustainability of the U.S. economic recovery by the private sector after government stimulus programs end remains in questions. President Barack Obama said recently that he needs to consider additional measures to spur job creation and will convene business leaders, financial experts and representatives from labor unions and nonprofit groups for a forum at the White House. The stock market continues to edge upwards as companies are showing improvement at the expense of jobs. Consensus is that we are going to have another lean year ahead of us. The best advice I ever received was “Live below your means.”
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Jay Greenberg is a real-estate broker with Marcus & Millichap and can be contacted at 415-625-2115. Copyright © 2010 by Black Point Press. All rights reserved.