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?

Rental Market Update

In my opening remarks while introducing the Market Conditions Panel at the East Bay RHA’s 5^th Annual Trade Expo, I noted that job growth has been positive on both sides of the Bay for two consecutive months (August and September 2011) for the first time after 44 consecutive months of negative job growth in the East Bay, and that historically meant that our rents would be going up. But they have already been going up, so what was missing?

Realfacts, a company that surveys large apartment buildings with at least 50 units, recently came out with their report which indicated that the Bay Area topped the nation in rent growth, with San Jose (Santa Clara County) leading the Bay Area. Sarah Bridge, owner of Realfacts gave one newspaper a great quote, “The Bay Area definitely outperforms all other markets, and if you look at Santa Clara County year-over-year it’s approaching 13%, which is unprecedented (rent) growth for what’s happening overall in our economy.”

For those of you who have been following recent columns you know that we have been tracking job growth nationally and that for most of this year San Jose has been at or near the top of the charts in national job growth ranking, tending to prove the relationship between job growth and rent growth: San Jose — number one in job growth, number one in rent growth.

As San Jose puts pressure on the San Francisco rental market, the “push out effect” begins as tenants consider the Greater Oakland area and beyond, which is what we have been seeing since mid 2011. The tremendous job growth of Silicon Valley is probably a big factor in why the East Bay rental market has firmed up despite negative job growth. Another big factor is that tenants are not buying houses and, of course, that homeowners are becoming renters again as they lose or walk away from their homes. Lastly, there has not been a lot of multifamily housing built and a lot of what was built in the last ten years was condos that have been rented out. As those condos are sold this will shrink the rental housing supply and if the economy picks up at the same time our supply is stable at best, well, you know what might happen.

If the East Bay can string together several more months of positive job growth what might that mean for our already awakened rental market? At the time of this writing the European Union announced a $1.4 trillion dollar debt deal which Americans have been waiting for. If that is approved and proves adequate, it might be a catalyst for some growth in our economy as we move into 2012.

Also, our GDP growth came in higher than expected. Is a spike in East Bay rents in the cards for 2012? If what is happening in San Jose is any indication we may see our rents continue to go up. You will soon be receiving a form from EBRHA and the Market Conditions Committee requesting information for our 9th Annual Rent Survey, the first including Contra Costa County. Please fill it out, keep a copy for next year’s survey and send, email or fax us your information. It is kept confidential and will not be released. When the results are tabulated we will send you the summary. Maybe the results of this year’s survey will give us some indication of whether our rents are really going to take off.

Apartment Sales

Sales of apartments continue to get stronger although the market still has a high percentage of foreclosed and distress sales. In 2010 there were 58 sales of apartments with at least ten units in Alameda and Contra Costa Counties combined, of which 27 (46.5%) were distressed, including REOs. These sales do not include properties sold at the courthouse steps.

In the first three quarters of 2011 there were 79 transactions with 29 (36.7%) distressed sales. That is a very encouraging trend, sales are up and the number of foreclosures is down. According to CoStar, which provides market data for this column, the average cap rate in 2010 for non-distressed apartment sales with 10+ units was 6.5%. So far in 2011, through the third quarter, the average cap rate for non-distressed apartments has dropped to 5.7%, another encouraging trend because prices rise as cap rates fall.

A number of larger apartment complexes are changing hands which pushes the total sales volume up. In 2010, for sales over $500,000 with 10+ units in both counties, total sales volume for non-distressed apartments exceeded $144 million. So far in 2011 through 3Q total volume exceeded $521 million. That’s quite an increase.

If all goes well, I anticipate 2012 to be even better. Interest rates are still very low, the rental market continues to improve and if inflation does pick up there may be more money coming back into the apartment investment business. If you are thinking about selling, 2012 may be your year.