Market Market Update &
Rental Survey

Marin Apartment Rents

A quick note about my sources: In the third quarter of 2016, after REALFACTS data service stopping operations, I transitioned to using the CoStar Group. CoStar Group’s database 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’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.

The new CoStar Group rental survey shows Marin’s current second quarter 2019, average apartment rents at $2,507 per month. This is up slightly from the previous first quarter 2019 rent of $2,490. After seeing rapidly rising rents between 2011 and 2015, rents have settled into a more moderate pattern of rise. Rents are up 2.8% over this same period a year ago and 5.5% above the same period two years ago.

More importantly, the vacancy rate has remained low, from a recent high of 4.1% in the third quarter of 2017 to a current 3.4% in the second quarter of 2019. This low vacancy rate suggests that there is still added pressure on rents to continue rising.

Marin Apartment Market Update

The “Total Apartment Sales” graph demonstrates that Marin apartment building sales activity peaked in 2004, and then dropped to a low during mid-recession in 2009. We reached average sales volume again in 2013-2015. Sales dropped off in the following three years for no logical reason other than a lack of Sellers. Sales activity, especially in the larger buildings has picked up again over his last year. Duplex and Triplex sales remain below average due to a continued lack of Sellers in the marketplace. Well priced properties sell quickly.

The passage of Statewide Rent Control will slow down the market for a period as Buyers and Sellers try to determine what effect this bill will have on apartment values. While we will lose for a while some buyers, given the lack of available buildings for sale, there are still many long-term hold buyers in the market looking for quality buildings. Still a great time to be a seller.

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.

Statewide Rent Control

It was inevitable. When rents rise as rapidly as they have recently, we hear the words “rent control” or “rent stabilization” in the news. Tenant groups seize the opportunity 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.

The State of California just enacted the “Tenant Protection Act of 2019”, Sec 1947.12 and Sec 1946.2 to the Civil Code, Statewide Rent Control and Just Cause Eviction.

History - The Statewide Rent Control and Just Cause Eviction measures were first introduced in the Assembly as two separate bills earlier this year. After great opposition from the California Association of Realtors (CAR), compromises were made in exchange for CAR not objecting to the amended bills. The bills passed the Assembly and were moved on to the Senate.

In the Senate, the two bills were consolidated into one, what would become the “Tenant Protection Act”. On September 5, 2019, the Senate amended the bill and took away some of the compromises made with CAR. In mid-September the Senate passed the bill and sent it back to the Assembly, where it passed two days later. The bill has now been signed into law by the Governor of California.

Overview of Bill - Owners are prohibited from raising rent more than twice and by more than 5% plus cost of living during any 12-month period. This applies to all properties except single family homes and some owner-occupied duplexes. The bill is retroactive back to March 15, 2018. If rents were raised to a level greater than allowed between March 15 and the enactment of this bill, the rent will revert back on January 1, 2020 to the March 15 rent plus the allowable increase.

The cost of living index used in this bill is the regional all items change in the consumer price index from April over the preceding April. While this index typically runs 2-3%, the most recent San Francisco area index is at 4.0 percent. This would allow for increases of nine percent this year.

Effective immediately, tenants that have been in place for more than 12 months may only be evicted for cause, such as non-payment of rent or a material breach of the rental agreement. There are some exceptions, such as for family members moving into a unit, or for major renovation.

Effect on the Marketplace - Initially the marketplace will slow down significantly as Buyers and Sellers try to figure out how the bill affects valuations. The slowdown could last 4-6 months. Beyond that, I do not see that the bill will have a negative impact on the value of most rental properties.

The bill will certainly have the greatest effect on “mom and pop” owners of buildings who have for years kept their rents well below market. Should such owners decide to sell, a new buyer will not be able to bring the rents up to market as in the past. Such “mom and pop” buildings will be less desirable than at-market buildings and will therefore sell at a lower price. It is unfortunate that the bill effects most those who have been the ideal apartment owners and good to their tenants.

This bill is not truly meant to be “rent control.” The bill clearly states it is designed to stop rent gouging, and toward that end it will be very effective. We have seen two or three buildings sell this last year in which new owners came in and immediately raised rents by almost 50%. Such measures are not at all the style of most new owners. In my experience, most landlords are very hesitant to give existing tenants rent increases of more than 5% and many opt for much less. The original compromise bill limited rent increases to 7% plus cost of living, so closer to 9.5%. The approved version limits rent increases to 5% plus cost of living, or say about 7.5%. Had the bill been passed with the 9.5% limit, most owners would most likely have continued with the practice of 5% or below rent increases. With the passage of the bill, the lower ceiling of approximately 7.5% becomes a number effectively sanctioned by the State. I believe that most owners will, and should, on a regular annual basis raise rents by this maximum new number. Rents will rise faster and more often with this bill as written.

On a positive note, many of the municipalities throughout California have been struggling with the issue of rent control and just cause evictions. Now that it is statewide law, these municipalities can back off on their local attempts to solve the problem. I am hoping with the passage of this bill that we will be able to convince the City of San Rafael, the Town of Fairfax, and the County of Marin to rescind their just cause eviction ordinances in favor of the new Statewide bill. The Statewide bill is much better written, is more comprehensive, and includes the all-important ability for owners to evict that one “bad apple” tenant that shows their true face during their first 12 month of being a tenant.

New Laws for 2019

Per Civil Code Sec 1954, Health and Safety Code Sec 17973, all buildings of three or more units with decks or balconies more that six feet above grade will need to be inspected by a licensed professional every six years and any maintenance or repair will be mandatory. The due date for the first six-year cycle is 2025, but given that the requirement is on the books, it will certainly put pressure on owners to have inspections and repairs done sooner.

Also going into effect as of January 1, 2019 is a law pertaining to Water Conserving Plumbing Fixtures. Per Civil Code Sec 1101.5, all multifamily residential properties built before 1994 must be equipped with water conserving plumbing fixtures.

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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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