Sonoma County apartment rents to stabilize in 2018

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Scott Gerber is managing director of Bradley Commerical Real Estate, based in San Rafael. He specializes in multifamily properties.

Read more local reports on North Bay commercial real estate markets: nbbj.news/creforecast18

Demand for apartments in Sonoma County can be summarized by a recent experience I had with a friend. I was about the put an apartment complex on the market, and I asked my former real estate brokerage colleague to look over the offering memorandum.

“Maybe you know of somebody that is looking for an apartment property.”

He looked at me, and after a brief pause said, “Scott, I don’t know anybody who isn’t looking for an apartment investment.”

RENT GROWTH AND THE WILDFIRES

Overall Sonoma County apartment rents grew by 5.95 percent from 2016 levels, and vacancy crept up to 3.5 percent from 1.9 percent a year earlier.

The rental market was poised for a leveling off in rents countywide before the fires in October. Especially at the high end and for larger unit types, rents had leveled off, and some larger unit types were sitting for longer than two weeks.

Demand for one-bedroom units staged a rally in 2017. Interest in two-bedroom units dropped, as fully employed workers sought their own place and moved out of a home or a shared unit.

But that all changed on Oct. 9, when residents of Sonoma County awoke to smoke and fire. Five months later, the postfire surge in rental demand has leveled off, but we will know more then our next rent survey of over 11,000 units comes out April 15.

It is worth noting that apartment managers throughout the county almost universally held their prefire pricing for refugees for months, regardless of the anti-price-gouging ordinance passed by Gov. Brown in October and in effect through at least until April.

RENT CONTROL

Ding-dong, the witch is dead! Or is she? On June 6, Santa Rosa voters rejected (52 percent to 47.5 percent) a rent-control ordinance passed by the City Council. However, strong rent-control sentiment and advocacy still remains robust in the county. In keeping with the spirit of the anti-gouging ordinance, supporters want to keep increases below 5 percent for renewals that are at market prices and below 10 percent for renewals that are below market.

SALES

Lack of inventory and transactional activity marked the year. Sales activity for 2017 was down 26 percent for properties with 10-plus units and up 15 percent for four- to nine-unit properties. However, strong rents, investor appetite, a strong local economy and low interest rates combined to drive prices.

Prices for properties with over 10 units were up 11 percent.

The average gross rent multiplier (GRMs) rose to 13.85 for the 14 transactions reported. GRM is a multifamily-property-investment metric that’s a ratio of the purchase price to annual gross rental income.

Complexes with four to nine units performed better, with prices up 18 percent and GRMs on the 30 transactions rising to 13.5 from 12.44 a year earlier.

NEW CONSTRUCTION

Five new communities, totaling 156 units, were built in 2017. Another 651 units are under construction. Undergoing approval are 19 complexes with a total of over 1,300 units. An additional 1,000-plus units are proposed.

LOOKING FORWARD

In 2018 expect apartment rent prices to stabilize. I expect mid-single-digit rent increases countywide. Sales activity should pick up as pent-up inventory is released.

What would cause this? Rising interest rates and stabilizing rents/incomes will put pressure on prices. As it becomes clear that prices and rents are not growing significantly, owners may opt to take profits, exit partnerships or exchange into markets or product types where they see greater upside potential.

Scott Gerber is managing director of Bradley Commerical Real Estate, based in San Rafael. He specializes in multifamily properties.

Read more local reports on North Bay commercial real estate markets: nbbj.news/creforecast18

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