[caption id="attachment_89539" align="alignright" width="179"] Scott Gerber[/caption]
The Sonoma County apartment market continues to be a shining star in the North Bay. On the heels of another year of strong sales and rental activity, Sonoma County can include itself among the top rental markets in the country.
This comes as welcome news for a county that has had it’s share of economic challenges in recovering from the market collapse that devastated the country real estate market from 2008 to 2011.
While some folks were completely out of sync and scrambling to find financial footing in 2008--2011, some real estate investors found opportunities in both single- and multifamily residential properties. As rents improved starting in early 2012, overall market conditions stabilized and rent growth in 2012 of 6 percent, helped push sales activity to prerecession levels.Here and now
Multifamily investment sales increased again in 2013. There were 41 sales of properties with more than six units, compared with 27 sales in 2012. While transactions increased by 52 percent, total sales volume grew by 22 percent.
Interestingly, the statistics do not suggest higher prices. As a matter of fact, average price per square foot, my favorite indicator, was almost identical to 2012. Capitalization rates, a good measure of percentage return on investment, was down 28 basis points to 6.11 percent.
That being said, to purchase an average 10-plus-unit apartment property in Sonoma County today, the cap rate will be 5 percent to 5.5 percent with proper expense underwriting. Clearly, there is high or higher demand for these investments, with rent growth expected for the next few years. Rent growth for the year ended in the high single to low double digits, and occupancy was 98 percent.Looking forward
2014 looks to be another strong year for apartment investments and operations. Rent growth should be in the double-digit range for the next 12 months, and vacancy should be below 2 percent, based on early indications. Sales activity will be dependent on inventory, which is currently is at low winter levels, but expected to increase as the year unfolds and weather improves.
The important thing is that deal fundamentals remain very strong in light of the fervent deal activity over the past 12 months. Starting cash flows are in the 5 percent-plus range, and stabilized returns approach double digits on forward-projected income. This reflects favorably in comparison to investment alternatives.Big question
Where is new multifamily construction? Only a small handful of projects on the drawing board, and only one 100-plus-unit property is set to break ground. The supply side is seriously hampered due to high city and county entitlement fees.
As I've asserted before, if entitlement fees were reduced to $25,000 per unit, Sonoma County will see 5,000 units built over the next five years, which will ease our housing shortage and slow rent growth.
