market view
Feeling the Squeeze
by Jay Greenberg
In this article, the statistics through the end of June are reported regarding dollar volume, number of transactions and value indicators. The statistics are compared with the past two years (2007 and 2008) to give some perspective to the data. Value indicators have continued to decline from 2007 and 2008 in all categories and sectors. Based on pending sales, the third quarter should produce the most sales activity to date this year. The biggest question mark in our market is where, when, why and how the UBS/Lembi properties and situation will play out. The next big question is when the rental market will begin to stabilize. I am beginning to feel a pulse around town that we can only hope will last through fall and beyond.
The following are 2009 year-to-date (through the end of June) 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 $338 a foot in 2008 and $327 a foot in 2007 to approximately $269 a foot in 2009. Gross rent multipliers have decreased from approximately 16.77 times gross in 2007 and 16.70 times gross in 2008 to 13.79 times gross in 2009, and the cost per unit has decreased from approximately $296,000 in 2007 and $297,000 in 2008 to approximately $273,000 per unit in 2009.
Dollar volume for the 5-9-unit sector (through the end of June) in 2007 was approximately $147 million, with $94 million in 2008 and approximately $50 million for the same time period in 2009. The number of transactions in 2007 was approximately 89, with 51 sales in 2008 and approximately 29 in 2009.
For the 10-plus-unit sector in the same time period, the average price per sq. ft. has decreased from approximately $306 a foot in 2007 and $351 a foot in 2008 to approximately $246 a foot in 2009. GRMs have decreased from approximately 15.94 in 2007 and 15.34 in 2008 to approximately 14.40 in 2009, and the cost per unit has decreased from approximately $228,000 per unit in 2007 and approximately $312,000 per unit in 2008 to $183,000 in 2009.
Dollar volume for the 10-plus-unit sector in 2007 for the same time period was approximately $444 million and $263 million in 2008 versus approximately $31 million for the same time period in 2009. The number of transactions in 2007 was approximately 74 versus approximately 26 in 2008 and a whopping 11 sales in 2009. The sources of the numbers reported are the Marcus & Millichap Research Department, the San Francisco Multiple Listing Service and CoStar Comps.
All value indicators have continued to decline in all categories compared to 2007 and 2008. Price per sq. ft. and GRMs for both 5-9 units and 10-plus units have also declined from the first quarter of this year; however, there has been a slight increase in the cost per unit numbers. GRMs in both categories are impressive numbers at 13.79 and 14.40, respectively. These numbers do not tell the whole story. There are many buildings priced below these types of numbers that are not selling. We have buildings downtown that are still available below eight times gross and under $100,000 per unit; north of California Street, there are buildings that are priced under thirteen times gross and under $200 per foot. In the past few years, we never saw offerings under $200 a foot on the north side of town.
The Big Picture
The big story is dollar volume and number of transactions. In the 10-plus-unit sector, the numbers are scary. Dollar volume is off by 88% from last year and 93% from 2007. Buyers are sifting through large amounts of inventory and cherry picking the best-priced and highest-quality buildings. In essence, only the prom queen is being asked to dance. The 5-9-unit sector is doing better than the 10-plus-unit sector even though we are still off on dollar volume by approximately 47% compared to last year. For number of transactions, we are off approximately 43% from last year.
The third quarter should see an uptick in closings for 10-plus-units, based on
pending sales being reported in the market. The majority of the pending sales are related to lender/Lembi Group properties.
I refer to these as lender/Lembi Group properties because some of the properties are lender owned and some are a type of short sale where the Lembi Group or an affiliated entity is still on title. During the second quarter, approximately 25 lender/Lembi properties officially hit the market for sale. During this same period, many more properties and loan pools were being shopped around by the lenders. Everybody and anybody have been chasing these properties and pools. To date, there have been a few scattered sales, but nothing significant has happened.
Approximately 100 lender/Lembi buildings have been deeded back to the note holders or the notes have been sold to new investment groups. Some of the note holders have no immediate plans to sell. Others are waiting and watching what happens with this first round of offerings before making any decision about future sales. There are more pools that will be coming due in the next few months that are already in default. Loan pools are being discounted and shopped around. Unfortunately, nobody knows what is going to happen. The situation is so complicated and layered that it is impossible to predict where this is headed. The other unfortunate piece of this puzzle is that the market will not begin to transact at any significant level until there is some kind of indication of where this saga is headed. There is too much instability in the market; buyers are unwilling to commit capital to properties at current pricing levels until this situation becomes clearer. This is why our dollar volume and number of transaction numbers are so low.
Nationally, we lost approximately 216,000 jobs in August. In the San Francisco MSA, we lost 6,200 jobs from June to July. Bay Area unemployment has more than doubled since last year, up from 4.6% to 9.3%. Many of the folks losing jobs are not sticking around. Rents have dropped in San Francisco, but the cost of living is still very high. San Francisco is a very transient city. People flock here when times are good and they do not mind paying high rent with their high salaries. People love San Francisco as long as they can afford to live here.
Thankfully, the rental market has shown some improvement over the past 45 days. I personally had a very hard time renting units in April and May. The units that I did rent during those months were vacant for over 30 days. I even had a hard time renting a parking space during these months. You know the economy is bad when you do not receive any calls for a parking space in a top neighborhood. In the past, I could rent a parking space in ten minutes. I had estimated in my first-quarter article that rents had dropped approximately 20% based on the feedback that I was receiving from owners during April and May. Some long-term conservative owners have not had to decrease rents at all because they had never rented their units close to market rents.
The high-end neighborhoods have been hit the hardest. Renters are looking for the best value they can get for their money today. They are doing so by moving to more affordable neighborhoods, getting roommates and leaving one-bedroom units for studios and multibedroom units. I looked on Craigslist recently to see what the inventory looked like in several different neighborhoods, and the results spoke loudly. There are 16 one-bedroom units available today in the Tenderloin and Western Addition. There are 356 one-bedroom units available today in Pacific Heights. Approximately 45 days ago, I did the same type of search for two-bedroom units in Pacific Heights. At that time, there were 146 units available. Today there are 80—down 45%.
So, there are signs of life on the high end, assuming the unit is priced right and/or has more than one bedroom. I recently rented a two-bedroom Pacific Heights unit in about 10 days. The new rent is approximately 5% lower than the vacating rent. I had received many calls for the unit from people who were coming to San Francisco for work.
As a San Francisco resident, I am sensing a little more activity on the street. There seem to be more cars on the road and more traffic when leaving my office for the ride home. There has been good foot traffic at night, and restaurants seem to be filled. It is good to see people out and about. The stock market seems to be feeling positive about things these days. Existing home sales surged in July, and data shows that economic problems are bottoming out. We are certainly not out of the woods yet, but it’s nice to see the light through the trees.
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 reached at 415-625-2115. Copyright © 2009 by Black Point Press. All rights reserved.