Market View
by Jay Greenberg
We have come a long way baby, in a short time. Since the end of 1999 and the start of the new millennium, we have seen many changes in the local, regional and national economies. During this time period, interest rates dropped to 50-year lows and have now begun to slowly move higher. In the first five-year span of the current decade, San Francisco apartment properties have experienced strong and steady gains in appreciation. Will the current market be able to sustain this pace of appreciation and activity levels?
The late 1990s proved a wild ride in San Francisco and the Bay Area, as many of us participated in the technology boom that pushed the stock market to great heights and produced amazing returns. By the end of that decade and into the start of the new millennium, an old concept returned and took us all by surprise. Reality began to set in. In a relatively short amount of time, fortunes were lost, companies closed, jobs disappeared and rental gains evaporated. Many apartment owners fought hard, sitting on empty units and refusing to budge from their once achievable asking rents. Eventually, time and reality came together and most owners stabilized their vacancies and realized something is better than nothing, especially when it comes to rent and money. The past five years have proven to be a difficult time for mom-and-pop operators, struggling to keep their units full while experiencing declining income streams. On the other hand, some owners decided to cash in their chips and have reaped phenomenal gains from the sale of their properties.
The silver lining in this story is the historically low interest rates. As the stock market plummeted and jobs disappeared, interest rates began to fall, keeping many owners afloat while they adjusted to the realities of the changing market. As the rates continued to drop, many new investors entered and old investors re-entered the San Francisco apartment market. In early 2001, I refinanced an apartment property at 7.5% fixed for 10 years. I was very excited at the time about this new loan I had secured. A little more than two years later, I paid a prepayment penalty and refinanced again at 4.6% fixed for five years. Since that time, rates have slowly moved higher and today are approximately 1% to 1.5% higher. The Fed will most likely stick to this plan of measured increases on short-term interest rates, hoping to keep inflation under control.
The great news for owners who have held their properties and continue with the day-to-day struggle of property ownership is the continual rise in values that has occurred during this time period. Since 2000, values have steadily increased to today’s record highs for owners. In the 5-9-unit sector and the 10+ unit sector, cost per unit has increased approximately 30% between 2000 and the end of 2004. We do not yet have enough data for 2005. However, I believe the increases are continuing to move higher as I write this article. Brokers and owners are continually amazed by the value levels that hungry buyers are willing to pay. The number of transactions in the 5-9-unit sector for the first quarter of 2005 was 34 versus 32 in 2004. The number of transactions in the 10+ unit sector for the first quarter of 2005 was 19 versus 34 in 2004. This is a significant decrease from 2004, which set a record high for the number of transactions in the first quarter. I am not concerned by the decrease in transactions at this time because the dollar volume was very similar. The first quarter every year is slow compared to the following quarters, with last year being an exception. The dollar volume in the 5-9-unit sector for the first quarter of 2005 was $45 million versus $39 million in 2004. The dollar volume in the 10+ unit sector for the first quarter of 2005 was $108 million versus $112 million in 2004.
Will the market be able to sustain this pace of appreciation and activity? I believe, as interest rates slowly move higher, we will reach a point that will slow down the market. As the cost to service personal mortgages escalates, we will see buyers drop out of the housing market. Hopefully this will coincide with an improving economy. Buyers dropping out of the housing market should improve the rental market, especially if this coincides with an improving economy, which will bring in new renters and begin to pressure rent levels. I believe this scenario could cool off our market slightly; however, I do not see a bubble bursting unless we experience some kind of unforeseen catastrophe.
Partial list of sales for March 2005:
San Francisco Apartment Sales (10+ units)
| Sales Price | Units | Sq. Ft. | |
| 1501 Leavenworth St. | $3,300,000 | 24 | 10,445 |
| 1515 Greenwich St. | $5,245,000 | 35 | 19,485 |
| 1360 Green St. | $2,225,000 | 12 | 7,653 |
| 1801 Page St. | $2,195,000 | 12 | 8,550 |
| 1233 Arguello Blvd. | $2,295,000 | 12 | 10,895 |
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Jay Greenberg is a real-estate broker with Marcus & Millichap. He can be reached at 415-625-2115. Copyright ’ 2005 by the San Francisco Apartment Magazine. All rights reserved.