Apartments
Market Market Update &
Rental Survey
Winter 2011/12
Michael Burke has specialized in selling Marin’s residential income property for over 25 years. He is one of the few agents that limits his practice to this market segment.
Income property sales require an expertise that not all agents have. Since many sales involve tax-deferring techniques, more than a casual knowledge of tax laws and practice is necessary. Income and expense statements must be analyzed, leases must be reviewed and tenant estoppels drawn. Showing an income property is completely different than showing houses. One cannot tour agents and buyers through rental property without risking a tenant uprising.
Whether a duplex or a large apartment complex, you deserve someone specializing in Marin’s income properties representing you. Michael has been doing so for over 25 years and is the top producing agent in this field.
Marin Rental Update
We have been providing our readers a quarterly update on rents since 1992. The information is posted on our web site shortly after we receive the data and then mailed to Marin’s apartment owners. Raw data is provided quarterly by Real Facts, a contract data service provider. They survey 5800 apartments within 40 different large complexes in Marin for rents and vacancies. We break down their data into unit size and location to provide the most useful information to our readers. While the reported rents may not be truly “average” to most smaller apartment buildings, they are very helpful in demonstrating rental trends and vacancy rates that are applicable to all Marin buildings and owners.
The latest survey shows Marin’s average apartment asking rent increasing to $1790 per month. This is up a full 6.3% higher than this same period a year ago. If we look back one quarter further, these third quarter 2011 rents are up 8.2% over the second quarter rents of 2010. Prior to that rents had been flat to modestly declining since their peak in 2008.
Our vacancy rate decreased on a quarter over quarter basis to 2.8 % from 3.6% and indicates a continuing strong rental market. Keep in mind that 5% is considered “textbook” normal and rents tend to adjust up or down until a normal vacancy rate is achieved. If too far below 5%, rents rise until vacancy levels increase and if above 5%, rents tend to fall until the rate drops down below 5%.
One theory for this latest increase in rental demand is that the 20-somethings that have in the past few years moved back in with their parents or were sharing rentals with roommates have a renewed confidence in their career stability and are once again moving back into the rental market. Another theory offers that since home ownership and mortgages are harder to qualify for, we do not have that portion of the tenants exiting the rental scene. Given a constant new inflow, that would create a increasing demand. Supply and demand economics says rents have to rise.
Rents are also rising as more apartment owners feel the need to increase their rents to offset rising expenses. As the new property tax bills came out, the recent increase in the sewer rates (more on this later) became evident. If you have owned your building a long time, the sewer portion of your taxes might be higher that the taxes themselves.
It is important that you do keep your rents somewhat in line with market. In a strong rental market tenants expect an annual rent increase. Without one, you will soon be so far below market, that your building’s value can be affected and difficult to bring tenants up to market in the future.
Marin Apartment Market Update
The nationwide strengthening of the rental market has helped restore confidence in apartment building investment. Bolstering this turnaround is also a lack of confidence in the stock and bond market. The recent fluctuations in the stock market have sent investors running to the safety of Treasury Bills; sending rates to historic lows. Returns available from apartment investments far exceed these returns and investors are taking note.
Given the limited number of larger apartment sales in any year, trends are often hard to demonstrate. Duplex sales are more prevalent and may be more useful for indicating sales trends. During the first nine months of 2011, there were 56 duplex sales recorded. This is about the same as in 2010 and up 19% from the same period in 2009.
While the apartment building investment market bottomed out in mid to late 2010, it is still somewhat anchored by the public’s perception of the overall residential marketplace. It is interesting to note that during the first nine months of 2011, there were 1934 single family residential sales in Marin. This is up 6.7 % from the same period in 2010 and up 30.6 % from the same period in 2009. This increase in sales is coupled with a higher percentage of properties on the market having “Sales Pending” and fewer properties on the market for sale. Of the 1,479 properties for sale in October, 473 or 32% have sales pending. During this same period last year, 1622 properties were for sale and only 26% had sales pending. The number of foreclosure or bank owned properties being marketed is 58% below where we were last year.
Apartment building sales of note: In the Terra Linda area of San Rafael, a 30 unit building sold for $5,285,000 at a GRM of 10.0 (ten times annual income). A four-plex in downtown Larkspur sold for $978,000 and at 15.0 GRM. A San Francisco view tri-plex in Sausalito sold for $1,800,000. These last two sales, in which I represented the seller, clearly demonstrate that a premium price will be paid for premium real estate.
Values & Outlook
Valuations have changed! Buyers and sellers have been “sitting on the fence” waiting to confirm the direction of the market. While some sellers would like to wait for “prices to rebound”, there is no reason to suggest that prices will rise anymore than what they would from normal Marin appreciation. Buyers have been slow to come to market thinking there is still room for prices to go down or waiting for that volley of foreclosures of income properties. It is not going to happen and the buyers are back.
While it has been difficult to get a handle on the market with the limited number of comparable sales, prices have stabilized and are demonstrating current market valuations. Each property and each area within Marin is unique, and generalizations are difficult and dangerous. When rents declined during 2000-2005, values still increased pushing rent multipliers (GRM) up and CAP rates down. Now that rents have climbed and values have been downwardly adjusted, rent multipliers and CAP rates are moving back to more traditional and expected ranges.
A Marin duplex is selling between 14-18 times its annual income (GRM); a 4-plex at 12-15 GRM; a small apartment building at 11-13 GRM and a mid-sized complex at about 10-12 GRM. Premium areas 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 (return on investment) are running between 4% - 6% depending upon the size and location of the property.
Sewer – Pay Under Protest
This is my third summary of this very important “Hot Topic”. Your sewer bill is paid with and shown only on your property tax bill. Recent increases have been hard to miss.
The 17 different Sanitary Districts throughout Marin each sets their own rates. Over the last year we have seen most of these districts dramatically increase their rates; often more than doubling what they had been charging only a year earlier. The City of Mill Valley increased their sewer service charge to $694 per unit, up from $297; a 134% increase! Tamalpais Valley charges $1,013 per unit!
In fairness to the sewer districts, federal and state laws increasingly require sewer districts to upgrade their systems to prevent sewer overflows. I am not taking issue with the increased amount of money the various sewer districts need to operate. What I object to is the fairness in allocating the costs to different property owners.
In Marin, an apartment building is charged the same rate for each of its apartments as charged for a single family home. In other words, an apartment building of 10 studios is charged a rate equal to 10 estate homes. A luxury home pays $1,013 per year. A ten unit apartment building pays $10,013 per year. The apartments have similar or smaller street frontage, the same 4” sewer lateral and certainly do not put ten times the water into the system as the house.
Other Sanitary district throughout California bill properties for their sewer based on the amount of waste water put into the system (flow-based billing). We are asking that Marin Sewer Districts incorporate a similar fair system.
In my last article, I issued a “CALL TO ARMS”, asking you to write your sewer district a letter complaining of this unfair billing practice. The Marin Income Property Association (MIPA) sent apartment owners a letter asking to do the same. Many of you have responded with letters and many have attended sewer district meeting making your voices heard. It is starting to work!
Mill Valley recognizing the injustice of their current billing system quickly enacted a new ordinance #1250 that moves their billing away from flat-based to use-based. San Rafael now has the issue as “continuing agenda item” to publically discuss the issue. Ross Valley Sewer District ordered a $34,500 study regarding changing from a flat rate to a flow rate billing system. The study is expected out in December.
While we are seeing some early positive direction, this is only the start of a long difficult process. Without constant pressure from owners like yourselves and the associations that support you, we will not see change or we will see only a partial use-based system that will not be any fairer that the current system.
In a recent meeting with attorneys considering filing suit against the Sewer Districts, they suggested owners pay the current tax bill “UNDER PROTEST” to establish their refund rights. Call or e-mail me for detailed instructions on how to do this.
I have posted a list of contact information for all sewer districts on my web site www.MarinApartments.com or call and I will send you the list. Please write that letter and consider joining your local apartment owners association as it exists only for your benefit – www.MIPA-CAA.com. There is power in numbers. If you would like to see a sample letter sent by an owner, let me know; bcc me a copy of your letter.
