Market View

The Big Unknown

written by Jay Greenberg

As we look forward to the market re-opening, the million-dollar question is what kind of market will we be returning to.

Iam writing this article in late April, while the shelter-in-place statue remains in force. 2020 started off with escalating pricing levels and solid transaction momentum coming out of fourth quarter 2019, only to be completely shut down by mid-March. The statistics through the end of the first quarter 2020 are reported in this article, regarding dollar volume, number of transactions, and value indicators, and it will provide a glimpse of where the market was before everything came to a screeching halt.

Subsequently, we have been stuck in no man’s land while politicians jockey for future votes with proposals and legislation. The most important proposed legislation facing our industry is the revamped Prop. 10 from two years ago, now titled the “Rental Affordability Act” which was unanimously rejected by voters. If the “Rental Affordability Act” passes in its current form, there will be vacancy control for San Francisco landlords. The COVID-19 health emergency has commanded much attention, and I urge apartment owners to not lose sight of this very important upcoming piece of legislation.

The following are 2020 first quarter statistics (January – March) for the 5-9-unit sector and the 10-plus-unit sector versus the same time period for 2015 through 2019.

5-9 Units
The average price per square foot was approximately $453 in 2015 before jumping to $545 in 2016. This average slipped to $521 in 2017, rose to $557 in 2018, and dipped again to $541 in 2019. In 2020, the average cost per square foot rose again to $578, a 6.84% increase in a year-over-year comparison and the highest average we have seen in a decade. Gross Rent Multipliers (GRM) have steadily increased over the past five years, with a significant pull back in 2019. GRMs were approximately 17.21 in 2015, 17.38 in 2016, 18.48 in 2017, and 19.48 in 2018. In 2019, the average GRM dropped significantly to 16.47, and in 2020 this number rebounded to 17.17, a 4.25% increase in a year-over-year comparison.

The average cost per unit has bounced up and down over the past five years. The average cost per unit was $390,000 in 2015 and increased 20% to $491,000 in 2016, setting a new record. In 2017, this number pulled back to $448,000 before increasing to $503,000 in 2018 (another record) and then decreasing again to $472,000 in 2019. In 2020, the average price per unit came in at $533,000, a 12.83% increase in a year-over-year comparison and the highest unit price we have seen in a decade.

Dollar volume for the 5-9-unit sector was approximately $55 million in 2015 before jumping significantly to $85 million in 2016. Dollar volume remained high at $88.5 million in 2017 and $74 million in 2018, before dropping to $48 million in 2019, the lowest figure we had seen in five years. In 2020, dollar volume rebounded strongly to $82 million at the close of the first quarter, a 70% increase in a year-over-year comparison. Transactions increased from 21 in 2015, to 29
in 2016, and 33 in 2017, before dropping to 23 in 2018 and again to 17 in 2019. In 2020, we rebounded with 25 transactions, a 47% increase in a year-over-
year comparison.

10-Plus Units
The 10-plus-unit sector statistics follow the same pattern as the 5-9-unit sector, with all value indicators and sales stats increasing in a year-over-year comparison.

The average price per square foot has been mostly climbing from the bottom of the market in 2009. The average price per square foot was $464 in 2015, $545 in 2016, $556 in 2017, and $587 in 2018. In 2019, the average price per square foot dropped to $523 before rebounding again in 2020 to $621, a 19% increase in a year-over-year comparison. Gross Rent Multipliers dipped from 17.67 in 2015, to 16.92 in 2016, and 16.44 in 2017. The trend reversed in 2018 with an average GRM of 18.28 and then fell again to 13.56 in 2019. In 2020, the average GRM rebounded to 17.02, a 25% increase in a year-over-year comparison.

The average cost per unit had been trending upward for four years and then reversed in 2019. The average price per unit was approximately $391,000 in 2015, $427,000 in 2016, and $455,000 in 2017. The trend reversed in 2018, with the average cost per unit dipping to $439,000, and again in 2019 to $414,000. In 2020, the average price per unit jumped to $488,000, a 18% year-over-year increase and the highest average in a decade.

Dollar volume in the 10-plus-unit sector hit approximately $130 million in 2015 before dipping drastically to $69 million in 2016. Dollar volume rebounded significantly to $103.5 million in 2017 and $171 million in 2018. In 2019, we saw a decade-low dollar volume of $57 million before it increased dramatically to $236 million in 2020, a 311% increase in a year-over-year comparison. There were 17 closed transactions in 2015, 11 in 2016, 14 in 2017, and 21 in 2018. In 2019, there was a record low of 6 transactions before bouncing to 21 closed transactions in 2020, a 266% increase in a year-over-year comparison.

The sources of the numbers reported are from Jay Greenberg, Trigg Splenda, San Francisco Multiple Listing Service, and Costar Comp.

In Summary
All value indicators, transactions levels, and dollar volume increased in a year-over-year comparison for both reported sectors. The market experienced a significant rebound compared to 2019 figures, and there was positive momentum moving forward. The numbers for first quarter 2020 are very impressive, especially when you consider the market shut down prior to the end of the first quarter. It is worth noting that some of the year-over-year increases are absurdly high, and this is due to a very weak first quarter in 2019.

I hope that by the time you read this article, our markets have re-opened and that we are all back at it. But the million-dollar question is what kind of market will we be returning to.

Eviction moratoriums for the health emergency have been mandated. Rent decreases have been proposed, and there is a bill coming to vote in November known as the “Rental Affordability Act” (RAA). This bill should be on everybody’s radar.

The RAA initiative comes two years after the defeat of 2018’s Proposition 10: “Housing Is a Human Right,” which would have repealed California’s Costa-Hawkins Rental Housing Act. About 60% of voters voted against Proposition10 in 2018. The following year, Governor Gavin Newsom signed AB 1482 into law, which caps the amount a landlord, owners of multifamily buildings (not built within the last 15 years), and corporations that own single-family homes can raise rent.

The “Rental Affordability Act” will allow cities to expand current rent control restrictions to include vacancy control and whatever else our Board of Supervisors could concoct. Just as we did with Prop. 10, we need to fund the battle to win. The cost of the campaign battle will be around $70 million. The ask to fund the campaign is $100 per unit owned or managed. Please go to www.CFRH.org or www.sfaa.org for additional information. 

As always, we have exciting times ahead. Wishing health and peace for everyone.

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