Market Market Update &
MARIN MARKET UPDATE AND RENTAL SURVEY
Michael Burke has specialized in selling Marin’s residential income property for over 35 years. He is one of the few agents to limit his practice to this market segment. Michael’s wife Pamela, who has been assisting for years in the background, has joined Michael as an active licensed agent.
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 to have a specialist in Marin’s income properties representing you. Michael and Pam have been representing sellers for over 35 years and are the top-producing agents in this field.
Disclaimer: The opinions expressed in this newsletter are those only of Michael and Pamela Burke and not necessarily those expressed by Golden Gate Sotheby’s International Realty.
Marin Rental Update
A quick note about our sources: In the third quarter of 2016, after REALFACTS data service stopped operations, we transitioned to using the CoStar Group. CoStar Group’s database is much larger than that of REALFACTS and includes rent data from 651 Marin apartment buildings, 5 units and above, totaling 15,406 units.
The latest CoStar Group rental survey shows that, in the second quarter of 2022, Marin’s average apartment rents are at $2,769 per month. This is up from the previous second quarter 2021 rent of $2,635 or 5.1%. After seeing rapidly rising rents between 2011 and 2015, rents settled into a moderate pattern of increase and flattening, and now rents are starting to tick up again. The long-range forecast for rents by CoStar predicted that rents would begin rising this year and continue into the foreseeable future. CoStar suggests rents will rise more than 14% over the next four years or about 3.5% per year.
The vacancy rate remained relatively steady over most of the previous year or two and now has declined to the current level of 3.4% - down slightly from a year ago. This level of vacancy rate further supports that rental rates will continue to rise into the foreseeable future.
Statewide Rent Control (AB-1482) went into effect January 1, 2020. AB 1482 limits the amount that you can raise rents on existing tenants during any 12-month period. While you may raise rents up to two times a year, your total increase in any 12-month period cannot be more than 5% plus the April cost-of-living index. For the Bay Area, this cost-of-living index was 3.8% last year, allowing for a maximum annual rent increase of 8.8%. The index is updated in May for April, and the cost-of-living index is currently 5%. The maximum allowable annual rent increase will be capped at 10% until the next index is published in May 2023 for April 2023.
With rising interest rates and very high inflation, once again a few cities in Marin are looking into the idea of enacting a more stringent rent control than that in place Statewide - most notably Fairfax and San Anselmo. It is important to be involved, especially if you own properties in these areas. Rent control should not be enacted at a local level. This needs to be addressed only at a Statewide or at least on a count-wide basis. Let your local representative know your thoughts.
Marin Apartment Values
Marin duplexes are selling between 16-20 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.
2021 saw a 40.8% increase in the number of Duplex and Triplex sales, jumping from 98 sales in 2020 to 138 sales in 2021. 4+ unit sales also increased dramatically by about 81% from 21 sales in 2020 to 38 sales in 2021. The sale of the year, however, was the bulk sale of the apartments owned by Professional Financial Investors (PFI). PFI went into bankruptcy after the death of Ken Casey and the discovery of a “Ponzi Scheme” to the investments. After about a year and a half of transition, the apartments and commercial properties located in Marin and Sonoma were sold in bulk. The sale closed in December of 2021for $436,500,000.
2022 sales are off to a pace comparable with the increased sales activity of 2021. However, at any point in time, the inventory of buildings for sale remains very tight. A couple of notable sales this year are the Portofino Apartments in Sausalito. These 40 units sold in August for $20,750,000 or just over $500,000 per unit. A 10-unit building on Park Street in downtown Mill Valley also sold in August for $9,300,000. This price was $400,000 over the asking price. The buyer competed with six offers to acquire the building. I am happy to say that we represented that buyer. In July, a 48-unit building closed in Fairfax for $16,150,000.
The current market is all about interest rates. We started the year with residential rates hovering around 3%. By mid-March they were up to 4% and broke through 5% in mid-April. Since then, rates have settled into a range of 5 -5.75%. The effect of this on the marketplace has been somewhat dramatic, affecting mostly first-time entry-level buyers of single-family homes. At the beginning of the year, you might have qualified for an $800,000 house with a loan at 3%. Now you are struggling to qualify for a $700,000 house at 5.75%.
Interest rate hikes have not affected those buying residential income properties as much. For the most part our loans are not 30-year fixed interest rate loans; they are more of a hybrid of 5-7 years fixed and then adjustable for the balance of 30 years. Yes, these rates are up as well, just not as dramatically as in the residential home world.
Rising interest rates effect income property pricing in a somewhat different way. The anticipated return one expects on a property increases as interest rates increase. If one can get a high rate of return on a safe 10-year Treasuring Bill, then the rate of return on my real estate investment must be equally higher. To achieve a higher return given the same income, the price must be reduced. So why are prices not falling? Offsetting these changes in expected rates of return are expected rising rents from an inflationary economy. One, to a great extent, off-sets the other.
Still these changing rates have slowed the marketplace. Many investors are in a wait and see attitude. Others are jumping in to pick up on a slowing marketplace.
Apartment building loans are divided into two types: 2-4 units and 5+ units. 2-4 unit loans still enjoy a possible 30-year fixed rate term. 5+ unit loans have interest fixed for 5-7 years then rates adjusting for the balance of the 30-year term. The 2-4 unit loans mirror the residential market. The 5+ unit loans are available on a 5-7 year fixed rate of around 4.5-5.0%. Call for a current quote as these are changing daily.
The Federal Reserve System
The Federal Reserve System, often called simply the Fed, is the central bank of the United States and arguably the most powerful financial institution in the world. It was founded to provide the country with a safe, flexible, and stable monetary and financial system.
The Fed sets target interest rates at which banks lend to each other overnight in order to maintain reserve requirements—this is known as the “fed funds rate.” The federal funds rate is one of the most important interest rates in the U.S. economy. That's because it affects monetary and financial conditions, which in turn have a bearing on critical aspects of the broader economy including employment, growth, and inflation.
The rate also influences short-term interest rates, albeit indirectly, for everything from home and auto loans to credit cards, as lenders often set their rates based on the prime lending rate. The prime rate is the rate banks charge their most creditworthy borrowers—a rate that is influenced by the federal funds rate.
The Fed raised the target for the fed funds rate by a quarter-point during its March 2022 meeting. It was the first increase in borrowing costs since 2018. The Fed further increased the rate by 0.75% in each its May and July meetings and is expected to increase by the same again in September.
Federal Reserve Chair Jerome Powell and other board members are concerned about falling behind in their fight against inflation and have used rhetoric suggesting that they will be aggressive in their actions the rest of this year. While the fed funds rate most directly impacts what banks charge each other for short-term loans, it feeds into a multitude of consumer products such as adjustable mortgages, auto loans and credit cards. The increase takes the funds rate to its highest level since December 2018.
Many interest rates are independent of the Fed funds rate and, instead, follow 10- or 30-year Treasury note yields. These yields depend on demand after the U.S. Treasury Department auctions them off on the market. Lower demand tends to result in high interest rates. But when there is a high demand for these notes, it can push rates down lower.
If you have not done so recently, check out our website, www.MarinApartments.com. Aside from highlighting all our 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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