Market View

The Fire Still Burns

by Jay Greenberg

The second quarter is behind us now, and so far 2004 has been an exceptional year for apartment sales and values. Dollar volume and the number of transactions have soared since last year. Value indicators continue to rise. The rental market remains sluggish along with the job market. Interest rates have risen and dipped. Watching the political agendas play out through the upcoming elections will be interesting, especially in terms of the national economy and interest rates.

The first quarter of this year had tremendous statistics for dollar volume and the number of transactions. This momentum has continued through the second quarter. In the 5-9 unit sector, the dollar volume through June 30 is more than double what it was for the same time frame last year. Through June 30, 2004, we had approximately $147 million versus $73 million through June 30, 2003. The number of transactions in the 5-9 unit sectors through June 30 of this year is approximately 32 percent higher than the same time frame last year. Through June 30, 2004, we had 119 sales versus 81 sales through June 30, 2003.

In the 10-plus unit sector, the dollar volume through June 30 has more than quadrupled what it was for the same time frame last year. Through June 30, 2004, we had approximately $244 million versus $60 million through June 30, 2003. The number of transactions in the 10-plus unit sector through June 30 is approximately 64 percent higher than the same time frame last year. Through June 30, 2004, we had 85 sales versus 31 sales through June 30, 2003.

The numbers are phenomenal when you consider that the 2003 sales statistics were excellent compared with previous years. The dollar volume numbers are even more impressive when you consider the increase in this category versus the increase in the number of transactions. The rise in dollar volume far outweighs the rise in the number of sales. Through June 30, 2004, the value indicators continue to rise. So far this year, for 5-plus unit sales, the average gross rent multiplier (GRM) has risen from 12.54 in 2003 to 13.67 in 2004. In this same period, for 5-plus unit sales, the average cost per square foot has risen to $254 in 2004 from $207 in 2003. The $64,000 dollar question is who are the winners—the sellers, the buyers or the brokers? I believe it is a win-win situation; however, time will tell.

The rental market continues to be sluggish for San Francisco. I estimate the current vacancy factor to be approximately 7 to 8 percent. This is a high number for San Francisco, but considered a good number in most other markets. Rents remain flat, and owners need to be proactive in the rental process and deliver a quality product. Renters are shopping, and if you are going to fill your vacancies, you will need to compete with other available units. The employment data for the San Francisco Metropolitan Statistics Area also remains flat. So far this year, we have had slight increases in both the labor force and jobs.

While we have seen signs of a strengthening economy, recent numbers indicate that the recovery is not yet in full swing. Contrary to previous months, the June indicators were lackluster, with retail sales, employment growth, and manufacturing activity all coming in well below Wall Street expectations. In the last few months, I have seen the 5-year fixed rate for San Francisco apartments go from 4.5 percent to 6.15 percent and back to 5.45 percent. Greenspan stayed the course during the Federal Reserve’s August meeting and raised rates by a quarter point. The interest rates are the key to the success of our markets and eventual change.

The capital markets’ debate has become politically charged, with Democrats portraying the recent numbers as evidence of Bush’s inability to stimulate recovery, while Republicans argue a recovery is impending, if not underway. The bottom line is that we are still four to eight weeks away from knowing the truth about the economy. Rest assured that when we see strong employment numbers, coupled with a rise in inflation, rising interest rates are not far behind.

Partial list of sales for June 2004:
San Francisco Apartment Sales (10+ units)

Sales Price	Units	Sq. Ft.
1040 Greenwich Street $6,000,000	23	22,607
1516 Larkin Street $1,550,000	13	10,230
901 Bush Street $1,800,000	37	22,162
1760 Filbert Street $3,600,000	16	9,680
1688 Green Street $3,000,000	12	9,900
2360 Van Ness Avenue $4,200,000	23	14,982
2120 California Street $3,900,000	18	20,022
1801 Gough Street $9,400,000	40	39,660
1440 Sutter Street $3,450,000	15	15,015
3099 Washington Street $4,000,000	24	13,274
4350 Kirkham Street $3,275,000	24	18,708
650 Alvarado Street $4,900,000	27	21,237
610 Clipper Street $4,150,000	21	16,628
660 Clipper Street $4,600,000	24	17,177

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Jay Greenberg is a real estate broker with Marcus & Millichap. He can be reached at 415-391-9220 ext. 300. Copyright © 2004 by the San Francisco Apartment Magazine. All rights reserved.