As an East Bay apartment owner, you either experienced robust dividends in 2013 or you were left standing at the station. If you think you missed the train, do not fret. The East Bay market is charging full steam ahead into 2014.
The Bay Area’s economic recovery was fueled in part by the creation of high-paying jobs in San Francisco and throughout Silicon Valley, which boosted their respective housing markets. As a result, rent growth and apartment occupancy levels in the Bay Area are among the highest in the nation.
A combination of factors, including high rents in Silicon Valley and San Francisco plus the small number of apartments scheduled to be built, support the prediction of another year of modest gains.
Affordability is a large contributor for the East Bay boom. San Francisco rents, for example, average 50 percent more than units in the East Bay, and overall, effective rents in the East Bay are $800 per month lower than rents in San Francisco.
This is great news for East Bay multi-family owners. Because many renters need to bypass the high costs of San Francisco, they are migrating into upscale neighborhoods from Oakland and Berkeley to Walnut Creek and beyond. Cities like Fremont, Hayward and San Leandro are attractive because of their proximity and ease of commute to the Peninsula and Silicon Valley job markets while also being equidistant to San Francisco.
Improved apartment conditions have had a positive domino effect throughout the Bay Area as a whole. For example in some East Contra Costa County areas, such as Antioch and Brentwood, operators raised effective rents by more than 6 percent in 2013. However, occupancy in East Contra Costa is lower than the East Bay metropolitan area as a whole. Through the second quarter of 2014, rents are predicted to surpass the pre-recession high as they have already in core market areas.
Two prominent East Bay developments are moving forward, bringing housing and jobs. Both projects will be constructed on land formerly owned by the United States Army. The Dublin Crossing project, a master-planned transit-oriented development (TOD) within walking distance of BART, will add 2,000 homes and commercial space. The Oakland Army Base is also undergoing a transformation to become a logistics and warehouse center that will create thousands of jobs. In total, there are fewer than 1,000 new market-rate apartments slated for construction in the East Bay this year.
Industry experts predict that 24,600 jobs will be created in the East Bayt his year. This will expand company payrolls by 2.4 percent. Apartment vacancy will fall 0.02 percent in 2014 to 2.7 percent and effective rents will rise 3.2 percent to $1,704 per month, building on last year’s gain of 8.3 percent.
Much like renters, investors are also pursuing options in the East Bay to balance their portfolios by chasing apartments that produce higher returns. Most of these buyers will focus on stabilized properties near major demand generators such as transit stations or employment districts. Average cap rates for these properties begin in the mid-4 percent range for high-quality apartment complexes and move close to 7 percent dependent upon condition, neighborhood, etc.
While some investors look to buy properties with opportunities to add value through renovation then reposition to take advantage of growing rents; many buyers seek more turn-key operations. Purchases based on potential turnover in a rent-controlled, heated market can be risky.
The number of multifamily property transactions completed in the Bay Area in 2013 was much higher than those in the years between 2005-2011, possibly due to owners’ ability to refinance and redeploy equity from other apartments. For example, the number of sales transactions in Hayward and San Leandro alone increased by nearly 20 percent from the number of sales in those cities during the market peak in 2006.
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Another key factor for the increased sales volume may be the positive leverage investors are able to achieve with interest rates often below cap rate levels. Investors are willing to pay near peak level prices as long as the delta between available debt versus capital returns remains attractive. Although sales prices haven’t quite reached pre-recession levels in some areas, those prices should return during the first half of 2014 so long as interest rates rise only modestly amidst the Federal Reserve’s plan to taper the stimulus program.
Cap rates in 2013 were 30 basis points higher than in 2007, as condominium conversion activity and sales that were based on speculative price appreciation were absent from the market.
While most investors have a positive outlook for an active 2014, a number of questions remain. Among them: Will interest rates increase? Will rents and occupancy levels rise or taper? Will sales volume and pricing continue to go up? Time will tell.
As an investor, you must use the best information and advice available. One cautionary note, do not base your investment decisions entirely on market timing. The decision to buy, sell or hold is a highly individual one that should only partially be influenced by exterior conditions.
David Weglarz specializes in sales and acquisitions of multi-family properties throughout the East Bay. David’s background in sales, analyzing credit and financial statements provide clients a unique perspective on market positioning. David has analyzed hundreds of assets and helped owners determine lucrative action steps throughout the Buy, Sell, Hold process. He takes pride in providing accurate pricing through detailed underwriting with strategic, targeted marketing and tactical negotiations. David may be reached at (510) 379-1287 or [email protected].