Market View

Where Are We Going?

by Jay Greenberg

I am continually amazed by the uniqueness of the market in which we operate. The majority of investors seem to think prices are going to drop and have held this view for at least 12 months. Common sense would support this theory. However, we are in San Francisco and nothing ever makes common sense. In the city’s better locations, it is common for investors to make a down payment of 50 percent for a trickle of cash flow. Good luck selling that deal in other U.S. markets.

When we compare the past two years, 2000 and 2001 (through October 1, 2001), we can make some interesting observations. In the market for 10+ units, the amount of transactions and dollar volume are virtually the same as last year. An even more interesting point is that there has been a slight increase in both the average price-per-square-foot and the price-per-unit. Meanwhile, in the same time period rents have dropped—in some cases, the decreases are as much as 25 percent. My simple explanation is that upside outweighs downside, and the cost to service $1 million in debt is approximately $20,000 cheaper than this time last year.

The number for the 5-9-unit sector tells a little different story. For dollar volume and number of transactions, we see approximately a 33 percent decline in both categories. However, price-per-square-foot and price-per-unit again rose slightly. Generally, the economics of the smaller buildings are less attractive than the larger buildings and it appears that buyers are showing restraint. There is also the possibility that in a smaller building the downside can be greater than the upside.
In both categories, price per square foot and price per unit have risen. If we go back 5 years, we would see a rise in both of these categories on a year-by-year basis. Not many other investment vehicles can show this type of steadiness, durability, and strength.

So, here we are and where do we go from here? Three months have passed since September 11. The rental market has further softened from job losses and the holiday season. Larger operators (100+ units) are experiencing 10 percent vacancies based on recent conversations. Consumer confidence fell again for the fifth straight month.

I believe consumer confidence will be the most important factor in determining our fate. If the public continues to fear the future and stops spending, the gap between sellers and buyers will widen and prices will drop. On the other hand, the Fed is trying to stimulate our economy, and many believe these effects will be felt by the middle of next year. An executive for a large Bay Area retailer described it to me like this: although you go to happy hour and have three cocktails in 30 minutes, you might not feel the effect immediately, but it is going to hit you and it is going to be soon.

So lets all go to happy hour. Hopefully everyone enjoyed the holidays with friends and family, and they also spent money. Only time will tell.

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. He can be reached at 415-391-9220 ext. 300. © Copyright 2002.