I think the word I would use to best describe the apartment market is “political.”
While apartments continue to dominate the real estate investment landscape in terms of demand, pricing and performance, local political leaders continue to allow the narrative to be around regulatory changes instead of ways to increase the supply of rental housing — or housing, period. There seems to be a sentiment floating around that providers of rental housing are the cause of the housing crisis, when in fact, the whole problem is a housing shortage.
Examples abound with unincorporated Marin County implementing mandatory mediation and just-cause eviction ordinances. Now, Sebastopol, Healdsburg, Santa Rosa and San Rafael either are considering or actually are implementing some form of rent or operational regulation. Today’s apartment investor — and broker for that matter — better be prepared to fight to protect their rights to operate without some form of government intervention.
Our annual rent survey of 12,000 Sonoma County apartments comes out in mid-April, so we don’t have that data yet, but Sonoma County rents have settled down to a low-single-digit annual increase. As of October 2018, annual rent growth was 4 percent, and vacancy was 4 percent. My sense is that annual rent growth is in the 3 percent range, and vacancy remains at 4 percent.
Every other economic sector would be ecstatic with these results, and I can tell you that nobody I know in the apartment business is complaining. But this trend demonstrates an overall stabilizing in this sector.
Overall, pricing has remained strong, and inventory has been typically tight in the North Bay. In the 12 months leading up to March 1, there were 28 sales of six-plus-unit properties, down from 37 the year prior. Total sale volume was up year over year, at $308 million, and price per unit settled in at just over $250,000. Capitalization rates averaged 5.1 percent, and price per square foot was $350.
Our most recent data show completion of 871 units countywide, with approvals for another 1,300 units and proposals for an additional 1,434. A strong market has “greased the wheels,” and municipalities such as Petaluma, Santa Rosa and Windsor are paving the way with an improved approval process. Rohnert Park will see hundreds of new units when the State Farm campus redevelopment, called Station Avenue, is completed.
In 2019, apartment rents will continue to stabilize. I expect single-digit rent increases countywide. Slow sales activity should pick up as pent-up inventory is released.
What would cause this?
Rising interest rates and stabilizing rents and incomes will put pressure on prices. That being said, I expect a continuation of the tight inventory of apartment investments in the North Bay for the foreseeable future.
Scott Gerber is managing director of investment sales for Meridian Commercial in San Rafael.
North Bay commercial real estate market reports
Read more insights from experts in various product types and areas in Sonoma, Solano, Marin and Napa counties: nbbj.news/crereports19