A recent Bloomberg article suggests that San Francisco is currently the hottest office market in the country, as indicated by the pending sale of a 10-story office building for $800 per square foot in SOMA (South of Market Area), a submarket where asking rents are up 22% over the past year. This would be the City's highest selling price for an office building since the commercial real estate market peaked in 2007.
Follow my logic here... Bay Area jobs are coming back in a big way, led by robust increases in the technology industry. Most of these young workers, in their 20's and 30's, are seeking multifamily rental housing. As a result, rental demand for apartments in cities like San Francisco and San Jose (see charts below) is going through the roof with 2012 forecasted vacancy rates of +/- 3%. Not surprisingly, Marcus & Millichap reports that San Jose and San Francisco have taken the # 1 and # 2 spots in the National Apartments Index, ahead of New York (# 3).
What follows next? Well, multifamily property values are on the rise in the Bay Area with compressing investor yields (cap rates), suggesting investors will soon be looking to nearby markets for better investment returns. Given the Sacramento area was hit so hard with housing foreclosures, many people have been forced to rent apartments, which is expected to drive region-wide multifamily vacancies below 5% in 2012.
The number of new multifamily listings for apartments in the greater Sacramento area is most certainly on the rise. Here on the ground, it feels like we may have it bottom this quarter in terms of apartments sale price per unit. Demand should increase from here, along with upward pressure on both rents and sale prices.
To give you an idea... an 11 unit REO apartment property sold in South Sacramento mid-2011 for $34,000 per unit to a value add investor at 9.9% cap rate. The property was 91% vacant at the time and in terrible physical condition. Over the next six months, the investor rehabbed units, replaced patio decks and siding, painted the entire property, and leased up the 10 vacant units at market rents.
After a turnaround period of just over six months, this property is now back on the market with an asking price of $67,000 per unit (8.1% cap rate). Notice this cap rate is even stronger (lower) than a recent sale just two blocks away, which closed in November 2011, where EAST WEST Commercial brokered the sale of a stabilized 14-unit apartment property to an overseas investor at 8.5% cap rate ($62,500 per unit). See video below.
All signs are positive that Sacramento has entered a period of slow steady growth with support from nearby Bay Area influences. Now is a great time to invest in multifamily housing and apartments while prices are still attractive.
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