The surging deal activity for multifamily, retail, industrial and office properties around the Bay Area is beginning to make inroads into the North Bay, according to local real estate market experts.
Multifamily properties continue to be among the most active commercial investment markets in the North Bay, according to experts.
[caption id="attachment_76719" align="alignright" width="180"] Jeff Mishkin[/caption]
“As slow as the North Bay has been to respond to the improving market in general, there are some good signs,” said Jeff Mishkin, San Francisco-based regional manager for Marcus & Millichap. The brokerage has completed or has in contract more than two dozen investment deals in the North Bay so far this year, and most of those have been multifamily properties.
There are more active buyers for multifamily complexes in Sonoma and Marin counties than there has been for at least seven years, and that activity has been growing since the end of the first quarter of last year, according to Scott Gerber in Cassidy Turley's San Rafael office.
[caption id="attachment_76720" align="alignright" width="130"] Scott Gerber[/caption]
"The market is strong, but it is not the H-word," Mr. Gerber said. "The fundamentals in my market for these investments is still very sound and very good. In a 'hot' market, prices stop making sense."
For example, a buyer of a Sonoma County property could expect a deal to have a capitalization rate of 5 percent to 6 percent -- perhaps, in the 4 percent range for new properties -- upfront cash-on-cash returns of 4 percent to 6 percent and a multiplier for a prospective deal of 10 to 14 times gross rent revenue, according to experts.
"Rents moving up are helping the market overall, so there is a positive outlook for multifamily investments," said Rami Batarseh of BN Commercial in Santa Rosa.
Investors priced out of the "hot" San Francisco, Peninsula and South Bay markets are turning to secondary Bay Area markets, experts said. This, they note, could accelerate as the cost of financing increases, such as a 75-basis-point rise in 10-year Treasury rates recently.
Apartment vacancy rates in North Bay markets in the low single digits and rising rents should spur multifamily property construction, but the cost of building new product is high, according to Mr. Gerber and Mr. Batarseh.
"Every apartment builder I know is idle right now because the permit and entitlement structure is such they can't afford to build proejcts," Mr. Gerber said.
If the total cost of fees and other charges from local government were to return to $25,000 per unit, as many as 1,000 units could be built, but a number of builders are facing fees of $35,000 to $40,000 a unit in Sonoma County, he said.
[caption id="attachment_76721" align="alignleft" width="180"] Ken Bizzell[/caption]
It is a catch-22 for local government, because fee structure is supposed to be based on the costs of processing project documents and less construction results in less fee revenue. Also part of the fee structure covers public-works improvements, leading to higher costs in certain parts of a city, according to Ken Bizzell, a Keegan & Coppin partner and specialist in residential development properties.
Buyers of residential land are interested in multifamily projects because of rising rents, but the prices they are willing to pay are almost half of prices at the peak building period in 2006--2007, he said.