Market View

by Jay Greenberg

As I write this article in late October, I am pleased that 2003 has been a very solid year for the San Francisco apartment sales market. The rental market has improved noticeably this summer, and job loss has dropped tremendously. The stock market has also had positive results, and interest rates remain at 40-year lows. There are many indicators that the worst of our recent times may be behind us.

Sales figures for the number of transactions in the 5-9 unit sector in September show a slight gain of 70 sales in 2003 versus 62 sales in 2002. The 5-9 unit sector has also had improved dollar volume over the past year with $91 million in sales for 2003 versus $72 million in sales for 2002. In the 10-plus unit sector, we have also had improvement with 40 sales through September versus 23 sales for the same time period in 2002.

The dollar volume, however, reveals a different story, showing $60 million in sales through September 2003 versus $146 million for the same time period in 2002. One of the reasons for this sizeable difference is that there were multiple $10 million-plus transactions that occurred last year. So far this year, the largest transaction is the sale of 73 units at 302 Eddy Street for $6,775,000. This is a HUD building with tax credits that sold to a HUD operator. The transaction was listed and sold by George Inskeep of Marcus & Millichap. James Devincenti, also with Marcus & Millichap, has his listing of 109 units in Russian Hill in contract and scheduled to close this year. The property was listed for $29,250,000. The sales market has been very active, with the largest buying pool that I can remember since the Loma Preita earthquake in 1989. I have seen many multiple-offer situations this year producing 20-plus offers.

Our peak years for total number of sales were 1998, 1999 and 2000. During that period, apparently anything offered for sale was sold regardless of pricing. Today, buyers are ignoring over-priced properties and competing for well-priced properties.

In my opinion, rent levels have been steady for over a year. This past summer, there was improvement in the rental market. This has been accompanied by positive migration into the city, with units renting quicker without concessions. My figures show the current vacancy rate at 5.4 percent. The average asking rent is $1,565. My figures also show that over the past eight years rents are up 31 percent.

The implosion of the dot com industry began in 2001. At that time, we saw massive job losses. These job losses continued in 2002, fueled by both the September 11 attacks and corporate scandals. This year we have seen a dramatic decline in the amount of job losses, and we are expecting mild gains in 2004. Recent news indicates a 30 percent gain in the stock market this year. There is also positive news appearing in other areas of the economy as signs of recovery become more evident. Amazingly, San Francisco apartments have been selling at all-time highs during this same period.

As owners, most of us have felt the pain as we tried to keep our units occupied. How can values remain at all-time highs when rents have decreased dramatically over the last few years? When we do the simple math, we can calculate that the cost of debt has dropped further than rents and values, which have remained steady. Lack of other investment alternatives and the popularity of our product type have pushed values even higher. How long will this last? As long as interest rates remain at these levels.