SF Apartment : December 2017


Peaks and Valleys

by Jay Greenberg

I am writing this article in late October, while enjoying another beautiful Bay Area Indian summer with hot days at the beach and evening walks without a jacket. The apartment market has been hot all year with excellent sales activity and dollar volume. Value indicators have slipped from 2016, but they still remain strong overall. With the arrival of the 4th quarter, we are seeing increased inventory and multiple offerings for larger buildings that have been scarce the past few years. With increased inventory and pricing adjustments, current activity levels in the 4th quarter are strong. The rental market remains tricky and coincides with the Bay Area employment market, which has been up and down and will probably continue this way for the time being. All in all, 2017 has been a strong sellers’ market and I expect this to continue through year end.

5-9 Units

The following are approximate statistics for January 1, 2017 through September 30, 2017, pertaining to the 5-9-unit sector versus the same time period for 2013, 2014, 2015 and 2016.

The average price per square foot increased from $373 in 2013 to $465 in 2014. In 2015 we had a slight dip to $448 per square foot and for 2016 the average jumped to $564 per square foot. In 2017, price per square foot was $542, a slight dip from last year’s high. Gross Rent Multipliers had been on the rise since 2009 and now we are retreating from the high mark of 21.48 that was set in 2015. The average GRM was 16.69 times gross in 2013, 19.51 times gross in 2014, and it reached an impressive 21.48 times gross in 2015. The average GRM notched down to 18.55 times gross in 2016 and 18.31 times gross this year.

The cost per unit has increased each year from $318,000 in 2013, to $374,000 in 2014, to $379,000 in 2015, and to $460,000 in 2016. The average has continued to rise in 2017 with the price per unit coming in at $498,000. We’ve had a significant decrease in GRMs from the 2015 high water mark and significant increases in price per foot and price per unit since 2015.

Dollar volume for the 5-9-unit sector was $165 million in 2013, $178 million in 2014, $169 million in 2015, and $220 million in 2016. 2017 has been a banner year to date with dollar volume rising to $244 million. The number of transactions was 79 in 2013, 77 in 2014, 64 in 2015, and 73 in 2016. There’s been another increase in 2017 with 87 closed transactions through the end of the third quarter. The 5-9-unit market is robust with the highest dollar volume and number of transactions we have seen in this current cycle.

10-Plus Units

The following are approximate statistics for January 1, 2017 through September 30, 2017, pertaining to the 10-plus-unit sector versus the same time period for 2013, 2014, 2015 and 2016. We reached peak pricing levels on all value indicators at the end of the 2nd quarter (2017). The 3rd quarter results shifted, and we now show a decline in all value indicators from the same time period one year ago.

The average price per square foot was $393 in 2013, $425 in 2014, and $471 in 2015. The average price per square foot skyrocketed in 2016 to $635. In 2017, the cost per square foot dropped $90 to $545 per square foot. Gross Rent Multipliers had increased for five straight years and, following a trend similar to the 5-9-unit sector, they have decreased over the past two years. The average GRM was 14.54 times gross in 2013, 15.81 times gross in 2014, and 17.01 times gross in 2015. For 2016, the average GRM dipped to 16.11 times gross and the trend continues in 2017 with the average multiplier coming in at 15.95 times gross.

The cost per unit has moved from approximately $311,000 in 2013, to $315,000 in 2014, to $368,000 in 2015, and it continued to rise in 2016 with a new high price per unit of $390,000. The downward trend for this third quarter continues with the average price per unit dipping to $361,000.

All value indicators in my 2017 second quarter report had escalated to all-time highs. One quarter later, we have all value indicators retreating from the previous quarter and from 2016 statistics. It is worth noting that there were three sales in the 3rd quarter that stick out like sore thumbs, regarding GRMs and price per unit. The majority of the units in these three sales were SROs. These units do not have kitchens and they share bathrooms. If the three mentioned sales are removed from the data, we then have an increase in cost per unit from one year ago and the average GRM moves up from the reported number above of 15.95 to 17.54 times gross.

Dollar volume for the 10-plus-unit sector for the same time period was approximately $458 million in 2013 and $336 million in 2014. We hit a five-year low of $320 million in 2015. In 2016 volume dropped even further to the lowest number we have seen since the bottom of our market in 2009, with $285 million recorded. This year we have bounced back impressively with $455 million in dollar volume. The number of transactions was approximately 53 in 2013 and 85 in 2014. Again, following the trend, in 2015 we had the lowest reported number of transactions for the five-year reported window with 49 closings. In 2016, another low was set since the bottom of the market in 2009 with 43 recorded sales. In 2017, we bounced back in the positive direction with 64 sales through the end of the third quarter.

The source of the numbers reported come from Jay Greenberg & Trigg Splenda Alain Pinel Investment Group, San Francisco Multiple Listing Service, and Costar Comps.

The Big Picture

Inventory levels in both sectors of the market have been strong all year; combined, we have the highest dollar volume we have seen since the financial meltdown. There are multiple trophy buildings currently available in the marketplace, including 18 10-plus-unit buildings. This volume of inventory has been rare the past few years and is a welcome site for brokers and the investment community. Larger buildings that require onsite managers (16 units and larger) are still at peak pricing levels; it will be interesting to see where the current supply of these larger buildings end up trading. Stay tuned.

The rental market remains tricky. The peak rental market is two years gone now and overall rents are down approximately 20% from peak levels. The rental market is super competitive and renters are shopping around. An agent in my office has been marketing a renovated two-bedroom unit in Cow Hollow with in-unit laundry for a couple months now. The asking rent began at $4,100 and it is now being advertised for $3,750—the showing activity remains low.

There have been a lot of swings in the rental market, depending on when vacancies occur. Between August and September, the Bay Area lost 4,700 jobs, the worst single month for the nine-county region since local employers eliminated 15,000 jobs in July 2010 (when the region had just begun to banish the effects of the financial meltdown). It’s getting tougher for companies to hire workers who are not in the highest earning levels (people who are not in financial and technical classes). A lot of people can’t afford to live anywhere close to where they work. Sometimes, they can’t afford the cost of commuting either. The main constraint on economic growth right now is housing, and it doesn’t matter if you are a homeowner or a renter.

On the flip side, in July (one month prior to losing 4,700 jobs) the Bay Area added 17,700 jobs. The job market’s ups and downs will probably continue since housing and transportation place physical limits on labor-force growth in the Bay Area. Subsequently, we will have the same ups and downs when vacancies occur. As we head into the holiday season, renting units will get tougher.

Interest rates remain at historical lows. Five-year fixed rates are available in the upper 3% to lower 4% range and variable rate loans are available in the low 3% range. Financing is not an issue in our current marketplace, and funds are easily accessible to qualified buyers.

In summary, 2017 has been a strong sellers’ market, which I expect to continue through the end of the year. I believe the buying community is starting to get fickle; we are starting to see bigger spreads in value indicators that I expect will continue as we move into 2018.

I want to wish the entire real estate community a healthy and peaceful holiday season.

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