SF Apartment : March 2018


The Big Bounce Back

by Jay Greenberg

The biggest takeaways from 2017 year-end statistics are the bounce back in dollar volume in the 10-plus sector after three consecutive years of declining volume; the decline of GRMs in both the 5-9-unit and 10-plus sector; and the year-end average for price per foot.

Additionally, the rental market remained cool (by San Francisco standards) while the office market is white hot and at peak pricing levels, providing a glimmer of hope for the next rental push for apartment owners. Interest rates nudged up throughout 2017 and still remain at historically low levels. We remain in a strong sellers’ market and I do not see that changing any time in the near future.

5-9 Units

The following are 2017 year-end statistics for the 5-9-unit sector versus the same time period beginning in 2014. The sources of all numbers reported in this article are Jay Greenberg and Trigg Splenda at Alain Pinel Investment Group, San Francisco Multiple Listing Service and Costar Comps.

The average price per square foot increased from 2010 through 2015, which is when we hit our peak pricing level. In 2014, the cost per foot was $442 a foot, and for 2015 the average price per foot skyrocketed to $652 a foot. Nothing goes up forever and in 2016 the average price per foot dropped to $506; it rebounded up to $552 per foot for 2017’s year-end.

Similar to the price per foot indicator, GRMs jumped significantly from 2010 through 2015, but in 2016 a pricing adjustment occurred. In 2014, the average multiplier was 17.11 times gross. In 2015, we had another significant leap with the average GRM coming in at 18.95 times gross, and in 2016 we had a slight pull back with an average GRM of 18.29. In 2017, multipliers retreated further and we end 2017 with an average gross rent multiplier of 17.37.

The price per unit indicators also escalated from 2010 through the 2015 peak and then pulled back in 2016. The cost per unit was approximately $401,000 per unit in 2014. In 2015, the average per unit cost jumped to $531,000, and in 2016 we had a pullback to $463,000 per unit. In 2017, the average price per unit rose slightly to $475,000. Overall, pricing levels remain high and 2017 value indicators are well above all previous years, excluding 2015 peak levels.

Dollar volume in the 5-9 unit-sector has been very strong and has increased every year since the financial meltdown occurred in mid-to-late 2008. Last year we hit a peak dollar volume level and we nearly matched the level again this year. For 2014, dollar volume was $247 million and in 2015 and 2016 the steady increase continued with $269 million and $301 million, respectively. For 2017, our year-end dollar volume was $299 million.

Transaction levels remain strong in the 5-9-unit sector. For 2014, we recorded 105 transactions and 2015 saw 94 transactions. In 2016, we ended the year with 102 transactions and in 2017 we recorded 105 transactions.

10-Plus Units

In my opinion, one of the biggest shifts in 2017 was the bounce back in dollar volume for larger properties. In 2011 and 2012 we topped $600 million in dollar volume for 10-plus units. In 2013, dollar volume topped $700 million. It then began to nose dive the next few years, dropping to $400-million-plus in 2016. In 2017, we had a big bounce back, with dollar volume topping $600 million again. Finally, larger properties became available in the marketplace and in the later part of the year there were actually options and multiple offerings available at the same time. As of mid-January, we had well in excess of $100 million in pending transactions, which is a very high dollar volume just a few weeks into the new year. There is still a big appetite for larger apartment offerings and the brokerage and investment communities are hoping for a repeat performance in 2018.

When we look back at GRMs for the reported period above, we see declining multipliers. To reiterate the data above, we went from 19.48 in 2015 to 16.21 in 2017 in the 10-plus sector, and from 18.95 in 2015 to 17.37 in 2017 in the 5-9-unit sector.

A little perspective goes a long way and 2017 average multipliers are very impressive indicators, especially when you compare current averages against average multipliers over the past 25 years, which were historically around 9 to 10 times gross. A 20 percent decrease in rents the past few years and creeping interest rates certainly justify the decline in the GRM value indicator.

On another note, the year-end price per square foot numbers of $552 (5-9 units) and $574 (10-plus units) seem low to me. If you can find quality properties around this price per foot, you are getting a good price with intrinsic value. I just sold 845 Waller St., a very clean and well-maintained corner building with parking and views next to Buena Vista Park, in excess of $900 per foot. Three Pacific Heights apartment properties sold in 2017 in excess of $1,000 per foot. The most recent was a 14-unit building with approximately 11,000 square feet, which sold in excess of $1,200 per foot.  That is a record setter and going to be a tough comp to match.

The Big Picture

Our peak rental market came and went in 2015. Since that time, the rental market has been spotty, with frequent up and down periods. Overall, rents have dropped approximately 20 percent from those peak levels. The city’s landscape has changed dramatically in the past decade and so has the taste of the young upwardly mobile model tenant that many owners seek. With a new class of non-rent-controlled apartments available city wide, inventory levels have jumped and renters have more options than a few years ago, when the construction boom was just beginning.

The new class of recently built apartments offer professional, sleek, modern designs with high-end finishes and many amenities. The downside is that not many of these properties are located in premier neighborhoods and these units, on a rent per foot basis, are the most expensive apartments in the city. Ultimately, the new generation is deciding between shiny new buildings with lots of lipstick and small living spaces in nontraditional neighborhoods and the older classic rent-controlled housing stock in the more established residential neighborhoods, which typically will have lower rent per foot costs with limited amenities.

On the flip side, the office market is white hot, with our 2017 office market the most expensive in the country. The biggest lease in San Francisco’s history was signed by Dropbox a few months ago for 736,000 square feet. Facebook signed a 436,000-square-foot deal in September and Adobe inked a 314,000-square-foot lease earlier in the year. In 2017, 17 tenants signed leases for space in excess of 100,000 square feet each. Office rents have soared approximately 150 percent since 2010 and still seem to be moving higher.

The demand for tech office space is strong and, for the sixth consecutive year, San Francisco is the top U.S. market for tech job growth. The tech job base grew approximately 40 percent over the past two years. Tech companies are cash rich and are gobbling up space for future expansion. The tech growth coincides with city planners pushing forward a rezoning plan that is expected to generate approximately six-million square feet of new office space. Is all that job growth music to anybody else’s ears? You have to be a real pessimist not to feel a little bullish about the future of apartment rents in San Francisco.

Interest rates ticked up through 2017 but still remain near historical lows. The Federal Reserve has entered 2018 without a clear plan for raising its benchmark interest rate, coupled with the added uncertainty of imminent leadership change. Currently interest rates for typical San Francisco apartment offerings are around 4 percent, with loan-to-value ratios hovering between 40 and 50 percent with plenty of liquidity available in the marketplace.

In sum, 2017 was an excellent year for sellers in San Francisco. For larger apartment properties, 16 units and up, we currently have an extreme sellers’ market. I believe 2018 will continue on this current path and am looking forward to another exciting year.

For additional information related to any data points and/or market news, please contact Jay Greenberg at jaygreenberg@apr.com.