[caption id="attachment_30860" align="alignright" width="200" caption="Scott Gerber"][/caption]
Rents in Sonoma County are expected to increase by 3.5 percent across the board this year as vacancy rates dip to almost zero and rental prices increase by 5 percent to 10 percent in areas of Marin, San Francisco, San Mateo and Santa Clara counties.
The North Bay apartment market gained positive footing in 2010 and that continued into early 2011. In terms of actual performance of properties, number of sales and pricing, the multifamily property market returned to the spotlight locally and nationwide.
With 2009 in the rearview mirror and the small number of distressed assets out of the inventory, investors stepped forward in slightly greater numbers.
In a nutshell:
Rents grew by 3 percent to 5 percent.
Occupancy increased from 94 percent to 97 percent.
Number of sales of properties with more than six units grew from 18 to 25.
Dollar volume of apartment sales grew from $133.5 million to $138.2 million.
During this period, foreclosed homes were snapped up by home buyers and investors, pushing those residents into the apartment demand pool forcing vacancies down and prices up. With a local economy still struggling, though, many landlords found it safer to pass on modest rent increases and stay full rather than push rents and risk vacancies.
The combination of strong fundamentals such as low vacancy, high demand and no new supply have set the stage for a continued recovery in this traditionally strong market sector. That, combined with fixed interest rates at historically low levels, provide investors with an opportunity to achieve positive leverage by acquiring properties at 6 percent or higher capitalization rates and financing them with fixed 5 percent debt, producing starting cash flows in the 5 percent to 7 percent range.
The best example of that dynamic is the recent sale of Enclave at Adobe Creek. After purchasing the 492-unit Petaluma complex in October 2009 for $52 million, the seller added approximately $1 million in capital improvements and sold the property to a bullish investor for $68 million. An asset manager for the buying party reportedly said, "Rents have only one direction to go."
Sales activity will continue to increase as more investors realize that apartment investments offer a more attractive alternative to other investment vehicles because of higher returns and the tax advantages of income shelter and capital gains protection under IRS Code Section 1031.