Market View

Full Steam Ahead

written by Jay Greenberg

Despite declines, this columnist sees a strong market, with historically low interest and unemployment rates.

Our market continues full steam ahead despite statewide rent control and “The Community Opportunity Purchase Act” (COPA) becoming law. The following report contains the usual value indicators and sales data that I report on each quarter for the 5-9-unit and 10-plus-unit sectors of the market. All value indicators have dipped from the previous year to varying degrees. Activity levels in the 5-9-unit sector remain strong while the 10-plus-unit sector has declined significantly. I will dig into the numbers and provide some perspective on the reported data. All in all, our market remains robust with solid fundamentals. I am not anticipating statewide rent control or COPA to have much impact in our market in the near term.

The following are approximate statistics for January 1, 2019 through September 30, 2019 pertaining to the 5-9-unit sector and the 10-plus-unit sector versus the same time period for 2016, 2017 and 2018.

5-9 Units
The average price per square foot has bounced from $564 in 2016, to $521 in 2017, and $553 in 2018. This year we ended the 3rd quarter with an average price per square foot of $549. Gross rent multipliers had been on the rise since 2009; we’ve been retreating since the peak GRM in 2015 of 21.48. In 2016 the average GRM notched down to 18.16 and then inched up again to 18.32 in 2017. The average GRM dropped slightly in 2018 to 18.3 and again in 2019 to 17.22, which is approximately a 6% decrease in a year-over-year comparison.

The average cost per unit has also bounced during the reported period. The average cost per unit was $488,000 in 2016, $466,000 in 2017, $494,000 in 2018, and $491,000 in 2019, which is approximately a half percent drop compared to the 2018 average.

Dollar volume for the 5-9-unit sector has been very strong since 2016. Prior to 2016, the highest dollar volume we had recorded was $178 million in 2014. Since 2016, we have topped $200 million each year. In 2016, volume jumped to $220 million. 2017 and 2018 were banner years with dollar volume rising to $244 million. 2019 is another banner year topping all previous highs with $265 million in sales. The number of transactions remains steady for the 5-9-unit sector. We had 73 sales in 2016, 87 sales in 2017, 77 sales in 2018, and 81 sales in 2019.

10-Plus Units
The average price per foot has jumped from $553 in 2016, to $548 in 2017, $633 per foot in 2018, and $600 in 2019, which is approximately a 5% decrease since last year. Gross rent multipliers have followed a similar up-and-down pattern over the past few years. The average GRM was 17.14 in 2016, 17.06 in 2017, 18.31 in 2018, and 16.05 in 2019, which is a 12.3% decline on a year-over-year comparison.

The cost per unit had been trending up since 2016, but that trend has reversed this year. The average cost per unit was $384,000 in 2016 and $394,000 in 2017. There was a big jump in 2018, when the cost per unit rose to $460,000. In 2019, the average cost per unit dipped to $440,000, which is a decrease of 4.5% on a year-over-year comparison.

Dollar volume for the 10-plus-unit sector for the same time period in 2016 was the lowest number we had seen since the bottom of our market in 2009 with $285 million in sales. There was an impressive rebound to $455 million in 2017. 2018 smashed the previous high, setting a new record with $919 million in closings. This year we have $436 million in closings, which is a 52% decline in a year-over-year comparison. In 2016 there were 43 sales, a new low since the bottom of the market in 2009. We bounced back in 2017 with 64 sales and did even better in 2018 with 81 closings. In 2019 we dropped to 50 sales, which is a 38% decrease on a year-over-year comparison.

The source of the numbers reported come from Jay Greenberg & Trigg Splenda Compass Commercial, San Francisco Multiple Listing Service, and Costar Comps.

In Summary
The 5-9-unit sector has remained steady and strong in 2019. Although we have declines in all value indicators, the price per square foot and price per unit declines are less than 1%, and the GRM has dipped approximately 6% in a year-over-year comparison. The number of transactions increased 5% from 2018, and dollar volume set a new record with $265 million in closings, an increase of 9% in a year-over-year comparison. Inventory levels remain strong with approximately 49 properties currently for sale.

In the 10-plus-unit sector, the declines are more significant. On a year-over-year comparison, GRMs dropped 12%, cost per square foot dropped 5%, and cost per unit dropped 4.5%. The number of transactions dropped 38% and dollar volume dropped 52.5%. A little perspective goes a long way though. 2018 was a very unusual record-setting year in the 10-plus-unit sector. I knew going into 2019 that it was unlikely we’d match 2018 activity and pricing levels. If you remove 2018 figures from the comparison, we would have a 6% decline in GRMs, a 9% increase in price per square foot, and an 11% increase in price per unit. Excluding 2018, dollar volume and number of transactions are still low and below average.

Activity levels for 10-plus-unit offerings are robust, yet inventory levels are low. There is high demand for larger buildings, yet not much product is available. Even though the stats show a decline in value indicators, I would argue that well located buildings with 16 units or more (required to have on-site management) are the hottest and priciest product in the marketplace. Yet, as the stats show, there are not many owners willing to let go of this type of asset.

Fundamentals in our marketplace remain strong: interest rates and unemployment
remain at historical lows. Jobs are the biggest driver in our marketplace and keep rents high, vacancy factors low, and investors bullish. Employment is expected to grow through the end of the year in most regions of the Bay Area, according to a mid-October forecast released by Beacon Economics, an economic research firm based in Los Angeles. Employment in San Francisco and San Mateo counties is expected to grow by about 3.5 percent. The forecast comes following 12 months of growth in each region. For the 12 months ending in August, total jobs in the San Francisco area grew by 3.4 percent to almost 1.2 million. That surpasses growth in the state of 1.8 percent. Job growth in the East Bay over the same period came in at 1.9 percent, reaching 1.2 million. In the South Bay, employment expanded by 2.9 percent to 1.16 million jobs. Unemployment in each region is expected to be around 3 percent or even lower through the end of the year. In San Francisco, the unemployment rate dropped again to its historic low of 2.1 percent.

Statewide rent control and COPA ordinance have been popular topics in our industry of late. I do not see much impact to the local apartment market. Our local rent control ordinance takes precedence over the new state law, meaning there won’t be any real changes for our marketplace. For the time being, COPA does not seem to be having an impact on the selling process. We are in the early stages of this new ordinance, and it will be interesting to see how it and those involved with it evolve over time.

For additional information related to any data points and/or market news, please contact Jay Greenberg at