Market View
By Jay Greenberg
The year 2002 has been a strong one for apartment transactions despite continuous negativity in virtually all aspects of our economy. The California Employment Development Department reported a loss of approximately 19,300 working people between August 2001 and August 2002 based on the San Francisco Metropolitan Statistical Area (SFMSA). The Department also reports 27,400 fewer jobs in the SFMSA for the same time period. The unemployment rate for the SFMSA for August was 5.4 percent, compared to 6.2 percent for the state, and 5.79 percent for the nation. The financial markets continue their downward slide. The good news is we had a beautiful summer with a lot of sunshine and no blackouts.
I believe rents have flattened, and I have not seen much change between early- and mid-2002 rental rates. Although many owners still have significant vacancy problems, a greater number are experiencing 100 percent occupancy. If you are one of those confronting continued vacancy problems, you need to be far more realistic now.
There are no new jobs or people, and there’s plenty of competition out there. Until you achieve a strong level of interest in your units, you will not solve your vacancy problem. I suggest you drop your rents to a level that will attract a wide selection of potential tenants during a two-week period. Once you have established a strong level of activity, you can then begin to test what the market will bear with your next rental. Last week I followed up on three properties in my neighborhood that had “for rent” signs and discovered there were 14 vacant units available. On the flip side, one of my clients has rented over 20 units in the past 90 days and has also converted a furnished corporate rental property into unfurnished apartments. He notes that he is attracting upper-end tenants and receiving top rents with one-year leases, along with good credit and standard rent to salary ratios.
In my opinion, prices appear to be softening slightly. There are also a good number of quality properties for sale. Correct pricing is extremely important right now. Partial List of Apartment Sales for August 2002: Buyers have many more options so they can bypass poorly priced yet quality properties. Again on the flip side, multiple offers are being made on well-priced properties and some are above list price.
A comparison of the five-to-nine unit sector between 2001 and 2002 indicates 62 transactions in 2001 versus 65 in 2002. The dollar volume for this sector reflects $70 million in 2001 versus $77 million in 2002. For the 10-plus-unit sector, there are similar figures. There were 51 transactions in 2001 versus 52 in 2002. The dollar volume for this sector was $137 million in 2001 versus $142 million in 2002.
I am very impressed by the strength and stability of the apartment market. Many owners buy apartments because they consider them to be the safest real estate investment. In San Francisco, owners who plan to be long-term investors buy small returns with good upside. These long-term investors find they have been greatly rewarded. I believe a major factor in the increase of apartment inventory is that long-term holders work harder than ever. Many are just tired of the management, tenants and city politics. After long-term ownership, they are ready to reap their rewards and move their equity from rent-controlled apartments, with limited return, to non-rent controlled, management-free properties. Triple-Net properties with long-term leases and national tenants like Walgreen’s have become the new product of choice for the disgruntled long-term apartment owner.
If you need more information pertaining to this article or the above-listed transactions, feel free to call me at 415-391-9220, ext. 300.
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.