Sonoma County multifamily real estate buoyed by virus, fire relief measures
While every industry sector has been affected by arguably one of the worst and most unexpected global disasters in recorded history, the real estate landscape is one that will undoubtedly be strewn with winners and losers as the dust settles.
As the multifamily housing industry was navigating a pandemic, California statewide rent control and myriad local ordinances prohibiting rent increases and evictions for any reason, we got treated to an insurgence on the U.S. Capitol amidst a highly contested presidential election. If that’s not a lot of chaos, I don’t know what is.
That being said, the ever-resilient apartment industry has remained relatively unscathed. I say, relatively. We have a lot to be grateful for, and a lot to be concerned about.
Has wildfire and insurance coverage become daily conversation? Yes.
Before we get to rent pricing, let’s talk about rent collections. By and large, rent collections of occupied units has been in the 95% range in the North Bay amid the COVID-19 pandemic. Shocking but true.
That speaks positively for the employment rate and ability of apartment dwellers to pay rent. It is unclear what percent of those payments are government stimulus and relief payments, but I believe it is not more than 15%–20%.
Annual Sonoma and Marin rent growth is flat, and vacancy is up to 5%. More specifically, my survey of 11,825 units showed rents were down less than 1% as of October 2020, and vacancy rose from 3.6% in October 2019 to 5% in spring 2020 and easing back to 4.7% in October 2020. Rents retreated by only 1 cent per square foot.
Reasons for the stabilization of rents include recent outmigration due to the fires and California’s anti-gouging law (Penal Code section 396), which limits rent increases after October 2017 to no more than 10%. That protection has now been extended through the end of this year.
Sonoma and Marin counties both benefited from a migration away from San Francisco and Oakland, as renters moved to less dense areas and to apartments with space to work from home.
Transaction volume continues its downward trend after two consecutive years, dropping again by 31% while pricing largely held ground, with 10-plus unit transactions averaging $306 per square foot and $270,000 per unit. Capitalization rates on sales remain in the 4.5% to 5% range. Gross rent multipliers went from 13 in 2019 to 12.4 2020, marking a slight decline.
Our most recent data show completion of 350-plus units in 2020, with another 300-plus units under construction or approved and set to be completed in 2021–2022. Several hundred units are in the pipeline, as the redevelopment of the former State Farm campus in Rohnert Park moves through entitlements.
In 2021, expect apartment rents to remain flat and occupancy to remain in the 95% range. While employment forecasts look strong, the addition of new inventory and the possibility of some migration back to the cities which would push vacancy up by 1%–2%.
Scott Gerber is a managing director of Meridian Commercial, which has offices in San Rafael and Petaluma. He specializes in multifamily real estate.
