Rolling Into 2012

2011 was a good year for apartment owners. Rents are going up, vacancies are going down, more sales are occurring, and our annual EBRHA Trade Expo was well-attended. As we get closer to 2012, what can we expect?

Positive job growth

The East Bay Economic Development Alliance (EBEDA) recently released their report predicting a “3% forecast for East Bay Economy’s growth rate.” Although the current unemployment rate is high and the economic prospects nationally do not appear to be that great, their forecast seems to dovetail with the new job growth graphs.

This is my first article written for the East Bay Rental Housing Association (EBRHA) and I would like to welcome our new members from Contra Costa County. This update from the Market Conditions Committee will discuss trends in the rental market and the apartment sale market.

East Bay rental market upturn may be historic turnaround

Job growth in the Bay Area has turned negative

(June/2011) … Job growth in both San Francisco and East Bay has turned negative since April 2011, which is not a good sign for the rental market since rent growth follows job growth.

Historically when job growth on BOTH sides of the Bay turns negative, Oakland area rents go down. Will history repeat itself? Please see the 2010 Rent Survey I produced for the East Bay Rental Housing Association.

Rental market alive and well

(September/2010) … As we head towards the end of the year this Labor Day weekend of 2010, it appears that our rental market is alive and well despite the uncertainty of the general economy and the high unemployment rate.

With the onslaught of ultra-low interest rates on apartment loans, it should be only a matter of time before apartment investors jump back in the market. The fundamentals seem to be in place for a recovery in the apartment sale market, a stronger rental market, low interest rates and rising capitalization rates (falling prices). The only thing missing may be confidence that prices have not hit bottom yet.

Apartment market poised for recovery

(July/2010) … As the 4th of July, 2010 holiday approaches things seem to be changing rapidly. The economy cannot seem to decide whether it is in a recovery or whether it is double-dipping. Economists cannot decide whether we will see inflation or deflation. The housing market seems to be going through withdrawals after Washington let the tax credits expire and historically low interest rates due to the flood of money buying US Treasury bonds do not seem to be enough to jumpstart mortgage lending. As landlords, we are trying to relate all these questions and concerns, and more, to our business of providing rental housing at a profit. The overall question we need to ask ourselves is whether or not we think history will repeat itself, because if it does we are right on track.

(May/2010) … March 2010 was the first time in 23 months that the San Francisco side of the Bay added jobs, according to California’s Employment Development Department (EDD). Past articles in this column have proven how important San Francisco is to the rental economy in RHANAC’s service area which includes Oakland, Berkeley, Alameda and Emeryville.

If the San Francisco/Peninsula area continues to add net jobs this should mean a pick up in their rental market and since there appears to be about a six month delay before rental trends hit the East Bay look for more signs of strengthening in our rental market later this year.

Rental market and sale market

(March/2010) … For the past few years this column has been following the apartment market on its way down. Although it did not collapse like the 1 to 4 unit market, nonetheless it has been grinding down to a near standstill.

A recent column noted that the worst of the rental market decline may be behind us and that cap rates on apartment building sales have been heading up, which pushes prices down. We may be approaching a point in time where there is a convergence between the rental market and the sale market and when that convergence occurs, that will be the bottom of the apartment market and the time to start buying.

Hope on the horizon

(November/2009) … As 2009 wound down, rental property owners found themselves in a particularly rough rental market as vacancy rates had risen and rents had fallen. But, rejoice: the worst is over. Just as I predicted that rents would peak in 2008, I am predicting that we have gone through the worst of the pain inflicted by this rental slump. The recovery in the rental market will begin shortly but it will not feel like much of one; rents will continue falling through 2010, just not as much as in 2009.

What a decade it was. The apartment market zoomed to great heights in the middle of the decade only to seemingly grind to a halt as the decade recently ended. Luckily it did not crash and burn like the 1 to 4 unit market but the slowdown in activity has been dramatic. Cap rates posted an impressive string of six consecutive annual declines from 2000 to 2006, hitting a low of 5.26%, followed by an ominous three year run-up through 2009 which shows no signs of letting up. As the jobs market deteriorated in 2008 the rental market finally succumbed in 2009 forcing many owners to lower rents at the same time cap rates were going up, resulting in a softening of apartment prices. 2010 looks to be more of the same as the apartment market does not seem to have hit bottom yet, according to several owners interviewed for this article.