Market View

Another Healthy Year for SF Apartments

by Jay Greenberg

Last year proved to be another strong and steady year for San Francisco apartments according to the number of transactions, dollar volume and appreciating values. This article contains my usual statistics for value indicators and sales volume for 2005. Financing continues to be the driving force in the investment real-estate industry, and rates should remain steady through 2006. Local economic indicators continue to move in a positive direction, while investors appear to be undaunted by lower returns and escalating prices. As of this writing, 2006 looks like it will be another steady year for San Francisco apartments.

The following are year-end statistics for the 5-9-unit sector versus the same time period for 2004. The average price per square foot has increased from $261 in 2004 to $293 in 2005. Gross Rent Multipliers have increased from 15.0 in 2004 to 16.5 in 2005, and the cost per unit has risen from $221,000 in 2004 to $247,000 in 2005.

For the 10-plus-unit sector in the same time period, the average price per square foot increased from $230 in 2004 to $274 in 2005. GRMs have risen from 12.76 in 2004 to 14.43 in 2005, and the cost per unit has risen from $160,000 in 2004 to $211,000 for 2005

Dollar volume was down slightly in 2005, as expected, for 2004 was a record-setting year for that market indicator. Dollar volume for the 5-9-unit sector in 2004 was $227 million versus $208 million in 2005. The number of transactions in 2004 was 179 versus 182 for 2005. For the 10-plus-unit sector, dollar volume was $320 million in 2004 versus $316 million in 2005. These figures do not include the sale of the Lake Merced Villas, which occurred in 2005 with a sales price of $700 million. The number of transactions in 2004 was 120 versus 114 in 2005. When comparing 2005 to 2004, you can see that this was another exceptional year for our industry.

Financing is the key that is driving the investment real-estate industry. Fixed-rate mortgages crept up in 2005; however, the movement was less than in 2004. You have to dust off the history books and go back to the 1960s to find mortgage rates as low as they’ve been in recent years. Long-term fixed rates defied forecasts in 2005 and remained well below expected levels throughout much of the year. While no single explanation for lower-than-expected long-term rates exists, the consensus appears to be that there is a great deal of cash around the world that is looking for a safe haven, and the 10-year U.S. Treasury bond is as safe as can be.

While long-term rates held steady, the rate on the one-year Adjustable Rate Mortgage rose in 2005 by about half a percentage point in reaction to increases in the Federal Fund Rate, which drove up short-term rates across the board. The Fed has continued to raise rates in 2006 until it pushed the Federal Funds Rate to a neutral, or even a slightly restrictive position, in the range of 4.5%. By doing so, the Fed has positioned itself to raise rates further if the economy should become overheated, or to reduce rates and stimulate the economy in case a recession appears on the horizon.

Slight gains in employment and population also occurred in 2005. Employment in San Francisco increased from 402,000 in 2004 to 413,000 in 2005. The labor force also increased in the city, from 427,000 in 2004 to 435,000 in 2005. The rental market has improved since early 2005, and many owners are experiencing rental increases for the first time since the year 2000. Down payments of 50% with 1.5% returns aren’t deterring investors from pouring millions of dollars into San Francisco apartments. Tremendous demand for San Francisco apartments is responsible for significant yield compression and higher down payments. The absence of attractive investment options has helped our apartment market to continue escalating prices. What other investment vehicle offers leverage, appreciation, income, depreciation, deferred exchanges, expense and interest write offs, cash-out refinance ability and many other amenities associated with investment properties?

All this brings us to a cautiously optimistic outlook for 2006. The market in 2006 should look a lot like 2005, with economic conditions holding steady, interest rates rising but remaining at historically low levels, continued strong demographics and relatively unchanged supply conditions.

Partial List of Sales for the End of November 2005:
San Francisco Apartment Sales

	Sales Price	Units	Sq. Ft.
700 Steiner St.	$7,650,000	36	23,886
625 Shrader St.	$2,800,000	12	10,350
1233 Arguello Blvd.	$2,730,000	12	10,895
1126 Bush St.	Nondisclosed	33	19,500

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 and can be reached at 415-625-2115. Copyright � 2006 by the San Francisco Apartment Magazine. All rights reserved.