Market Market Update &
Rental Survey

FALL 2018

MARIN MARKET UPDATE AND RENTAL SURVEY

Michael Burke has specialized in selling Marin’s residential income property for over 25 years. He is one of the few agents to limit his practice to this market segment.

Income property sales require an expertise that not all agents have. Many sales involve tax-deferring techniques requiring more than a casual knowledge of tax laws and practice. Income and expense statements must be analyzed, leases must be reviewed, and tenant estoppels drawn. Showing an income property takes understanding and tact. One cannot tour agents and buyers through a rental property without risking a tenant uprising.

Whether you are selling a duplex or a large apartment complex, you deserve someone specializing in Marin’s income properties representing you. Michael has been representing sellers for over 25 years and is the top producing agent in his field.

Marin Rental Update

quick note about my sources: I have been providing readers a quarterly update on rents in Marin County since 1992, and posting the information to my website, MarinApartments.com. I’ve drawn most of my rent survey data from REALFACTS, a contract data service provider that surveyed 5800 apartments within 42 different large complexes in Marin for rents and vacancies. Unfortunately, after 30 years of operation, REALFACTS retired and shut down their operations following the third quarter of 2016, so I have transitioned to using CoStar Group.

CoStar Group’s data base is much larger than that of REALFACTS. Their database includes rent data from 947 Marin apartment buildings, 5 units and above, totaling 14,959 units. CoStar Group has also recently acquired Apartments.com and ForRent.com, further increasing their data pool.

CoStar Group’s larger data pool will show different averages than the smaller data base of REALFACTS. This will more closely reflect the average Marin apartment building. Despite the different numbers, I observe that the trends appear to be the same. As a bonus, the lower, more accurate, averages should help us some with the Press, who have been jumping on Marin's high rents.

The new CoStar Group rental survey shows Marin’s current average apartment rents at $2,461 per month. This represents a slight increase over the previous 2nd quarter rent of $2,399. After seeing rapidly rising rents between 2011 and 2015, rents have settled into a more moderate pattern of rise. Rents are up 2.9% over this same period a year ago and 5.9% above the same period two years ago.

More importantly, the vacancy rate has once again trended lower from a high of 4.1% in the third quarter of 2017 to a current 3.0% in the third quarter of 2018. This decline in the vacancy rate suggests that there is added pressure on rents to continue rising.

Marin Apartment Market Update

We have experienced a lull this month in market activity due to the rising interest rates, the volatile stock market, and concerns over the world economy. I believe the lull is very temporary and I expect to see a strong market with limited inventory throughout the balance of the year. I have to say this is an incredible time to be a buyer or a seller.

The “Total Apartment Sales” graph demonstrates that Marin apartment building sales activity peaked in 2004 with over 60 4+ unit buildings selling, and then dropped to a low during mid-recession in 2009 with less than 10 buildings selling. In 2013, we broke through the historical average by recording 40 sales for the year, then 42 sales in 2014, and 43 sales in 2015. There is no lack of buyers in today’s market and sales activity has been limited only by a lack of sellers. We closed out 2016 with only 26 sales of 4+ unit buildings, and 2017 with only 28 sales. Sales for the first three quarters of 2018 are on par with 2017, with both years reporting 20 sales to date.

Duplex and triplex sales followed the same trend in recent years, as did larger apartment sales. Sales activity, which peaked in 2004 with 184 sales, fell to a low of 60 sales in 2008, and climbed back up to 110 sales in 2014 and 104 sales in 2015. In 2016, the sales number dropped to 84 per the Marin County Assessor, and 2017 followed suit with only 85 sales.

The continued lack of inventory, rising prices, and buyer demand present an excellent opportunity to consider a sale. Interestingly, a significant number of sales made in 2017-2018 were not openly marketed on MLS but many sales were “off market.” This is a typical trend in a tight market. To ensure you receive the highest price for your property, consider fully exposing your property to the market before accepting an offer.

Marin Apartment Values

Marin duplexes are selling between 14-20 times their reasonable annual market income (GRM); 4-plexes at 15-18 GRM; small apartment buildings at 14-16 GRM; and mid-sized complexes at about 13-15 GRM. Premium locations will be at or above the upper end of this range, and inferior locations or “problem properties” will be at or below the lower end of the range. Cap rates are running between 4% - 5% depending upon the size and location of the property. Smaller premium properties will sell at or for less than a 3.5% rate.

Interest Rates & Values

Interest rates are on the rise. We’ve enjoyed a long period of historically low rates, brought about, in part, by the Federal Reserve keeping rates at an artificially low level to stimulate a weak economy. The economy is now very strong, so the rates, to the extent they are controlled by the Federal Reserve, are going up.

The Federal Reserve (“The Fed”) increased the Federal Funds benchmark rate by 0.25% again this fall. The Federal Funds Rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis. The move marks the bank's eighth rate rise since 2015, continuing its policy of gradual rate rises. A majority of Fed members said they expect another rise before the end of this year, and forecasts show Fed officials expect about three rate rises in 2019 and one more in 2020, which would lift the bank's important federal funds rate to about 3.4% that year.

While all of this has the greatest effect on loans other than real estate, we are seeing real estate loans rise as well. Apartment loans fall into two categories, each with different lenders. In the first category are loans for 2-4 units, which usually have an attractive 30-year fixed rate of interest available. Current 30-year fixed rate investor loans are at about 5.0 – 5.5% interest, while owner-occupied and adjustable loan rates are lower. The second category of apartment loans includes buildings over 4 units (5+ units), usually with a minimum loan amount of $500,000. These loans generally have a term and amortization of 30 years. They will be fixed for only a portion of that term and then convert to an adjustable rate of interest. Rates hover around 5.0% - 5.25% for loans with a 5-7 year fixed rate period. Fully adjustable rate loans are available at a reduced rate.

Rent Control

When rents rise as rapidly as they have recently we start to hear the words “rent control” or “rent stabilization” in the news and tenant groups begin seizing opportunities to push officials to enact some form of rent control to make housing more affordable. With rents rising so much faster than wages or the cost of living indexes, tenant groups have ample fuel to use.

There is an important “Proposition 10” on the November ballot that requires your attention. The proposition seeks to eliminate the Contra Costa Act, which was enacted years ago when various municipalities were considering rent control. The Contra Costa Act excluded buildings built after 1985 from being eligible for rent control to encourage new construction. This ultimately limited municipality's ability to enact further rent control due to the exclusion of a large portion of the apartment base. The passage of Proposition 10 would eliminate this restriction from the books and lead the way to easier enactment of rent controls. I would strongly encourage you to vote NO on Proposition 10.

We have been fortunate in Marin because the Supervisors have been reluctant to consider full rent control. Instead, they have opted for more moderate approaches, such as mandatory mediation, when requested by the tenant, for rent increases over 5%. The approach is proving ineffective however, and officials are taking the position it is because tenants are fearful of retaliation if they request a mediation. This of course is not the case, as tenants have many protections under law against a retaliatory eviction.

Nevertheless, the county is considering enacting a “just cause” evictions ordinance, which would require that any eviction of a tenant be only for a specific cause, such as nonpayment of rent or breaking a term of their lease. Under the “just cause” ordinance, landlords would no longer be able to give a tenant notice to vacate without stating a reason, so evicting a problem tenant or opening a unit for upgrades would be more difficult.

The “just cause” ordinance could be a first step towards rent control. In my opinion, this is not a local issue and should only be considered at a statewide level. The ordinance has been put forth many times at a Statewide level and has not passed.

Sonoma County passed rent control and Just Cause evictions in 2016. The California Apartment Association immediately initiated a petition to put the issue in front of voters, who were able to successfully defeat the measures. Sonoma County attempted to put the measures back on the ballot this year but was not successful.

As responsible property owners, we must take care not to alienate tenants. While property owners must keep rents up with the market to maintain profitability, there is a point at which a raise in rent will make the front page of the Independent Journal. We learned after a hard-fought battle with the City of San Rafael about 15 years ago that a 10% raise in rents in one year tends to be the upper limit of what is tolerable for existing tenants. I suggest extreme caution in raises above this level.

FirstInMarin.com

In March of 2017, our company name changed to Golden Gate Sotheby’s International Realty. This is in keeping with our further expansion in the Bay Area. We incorporated Dreyfus Sotheby’s International Realty in the Silicon Valley and Bay Sotheby's in the East Bay into our company. We have over 400 agents in 18 offices throughout the San Francisco Bay Area serving the counties of Alameda, Contra Costa, Marin, Napa, San Mateo, Santa Clara, Sonoma and San Francisco. Our goal is to be not just the top firm in Marin, but the top firm in the entire Bay Area.

Golden Gate Sotheby’s International Realty has the agents who attract high-end buyers with the ability and desire to invest in Marin’s income properties. This is why I associate myself with the top residential brokerage firm instead of a commercial firm.

I am also a member of Top Agent Network (“TAN”). TAN is an independent network open only to those agents qualifying in the top 10% by essentially doing 90% of the business. Many properties are introduced to the market via TAN and sold before ever reaching the open market.

If you haven't done so recently, check out my website: www.MarinApartments.com. Aside from highlighting all my current listings, the site offers information on all of Marin’s income properties for sale, up to date recent and historical apartment sales, rent surveys, and a wealth of information for those thinking of buying or selling soon. The website also features a link to sign up for weekly email updates of all Marin apartment buildings that are currently for sale, that have sales pending, and those recently sold.

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Michael J Burke
500 Drakes Landing Rd.
Greenbrae, CA 94904
mburke@marinapartments.com
415.877.1077
Lic #00454938
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Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each office is independently owned and operated. mburke@sothebysrealty.com

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