Napa-Solano apartments: Rent incentives common as cap rates show improvement

Monday, March 15, 2010, 2:00 am

By David J. Buurma, CCIM, Cassidy Turley BT Commercial, dbuurma@ctbt.com

Dave Buurma

Assuming that historical indicators hold true, the recession is over, we are told, and the economy is starting to rebound at some level.

Since jobs typically lag any recovery by approximately 18 months, most apartment owners have withheld their exuberance pending observable improvement in the job market, as jobs more than any other economic factor affect multi-family property performance. That being said, there are some interesting trends to be observed in the first quarter of 2010.

Rents are off in general from the fourth quarter of 2009. Napa rents are off by approximately 4.1 percent, Fairfield is down 5.3 percent, Vacaville is up 0.9 percent, and Vallejo rents are down 5.2 percent. Those numbers, however, may not be as accurate an indicator as in a more robust market as tenant incentives are becoming very common place and necessary in many cases.

For example, on the low side of the area, 45 percent of the properties surveyed in Fairfield are offering tenant incentives, but those amount to a whopping 9.2 percent of annual income.

On the other end of that spectrum, more than 72 percent of the properties surveyed in Vallejo are offering tenant move-in specials, and they amount to 5.2 percent of annual income. Bottom line, the rental market is challenging, and owners are having to be creative to induce tenants to rent.

The sale markets in these cities have been even more elusive in their analysis due to the very limited amount of activity. For example, since Jan. 1, 2007, the line in the sand that may have marked the approximate beginning of the recession, here are the sales over 10 units in these respective markets: Napa, nine; Vallejo, three; Fairfield, 12; and Vacaville, three. Very few sales; but based on the limited data, here is what the buyers in the Napa-Solano markets are telling us.

Again, from 2007 to current quarter, Napa County cap rates have gone from 4.5 percent in 2007 up to 6.95 percent today. In Solano County, cap rates have gone from 5 percent up to 6.7 percent, and in Vallejo all the way up to 7.9 percent. Investors are truly demanding a higher return on actual income.

That being said, since the first of the year, there appears to be an increase in interest from buyers looking to buy and sellers looking to sell. Maybe the recession really is over.