January 2017 Report, Paragon Commercial Brokerage
Median Sales Price Trends by County
This report separates out the 2-4 unit and the 5+ unit apartment building markets in the 3 counties, since they have somewhat different dynamics and valuation metrics, and then drills down further on long-term trends in San Francisco.
Generally speaking, the residential investment market in the northern Bay Area remained strong in 2016, and there was consistent year-over-year appreciation across the board. However, as with home prices and apartment rents, the Oakland-Alameda County area has become hotter and experienced increasing demand, while in San Francisco, the market has cooled a bit from the frenzy of previous years. Note that median prices and average dollar per square foot values can be affected by other factors besides changes in fair market value, such as periodic, distinct shifts in inventory available to buy. Because of the relatively low number of sales in Marin, some of the analyses were deemed statistically unreliable and not performed for that county.
Average Dollar per Square Foot Trends
These analyses below, from our previous quarterly report, review values by San Francisco neighborhood submarkets:
Market Dynamics Statistics by County
Cap Rates, Average Days on Market, Sales Price to LP Ratios
The higher the cap rate, the higher the return on investment.
The higher the percentage of listings accepting offers,
the stronger the demand.
Typically, the lower the days-on-market, the hotter the market.
It is not unusual for larger buildings to have longer days-on-market.
Higher sales-price-to-list-price ratios signify a higher demand market
characterized by increased competitive bidding between buyers.
San Francisco Market Analyses & Trends
The SF market is dominated by smaller and older buildings. Substantial
new apartment construction has only occurred again in recent years.
San Francisco cap rates and gross rent multiples (GRMs)
appear to have stabilized in 2016.
Cap rate and gross rent multiple analysis relies upon accurate data (instead of scheduled or projected income and expense numbers) being provided by listing agents, which is not always the case. Thus all numbers in this report should be considered approximations.
These analyses below, from our previous quarterly report, illustrate financial metrics by city district:
Sales Activity, Price Reductions & Expired Listings
Many listings are still selling quickly for over asking price. Overpricing has significant
negative ramifications for sellers, including the possibility of not selling at all.
The inventory of SF 5+ unit listings has been slowly increasing over recent years.
The number of 2-4 unit building sales has plunged in San Francisco. We believe issues
related to condo and TIC-use conversion, and recent tenant eviction rules are the cause.
San Francisco Sales by Price Segment
Approximate Number of Sales by Building Size
Median sales prices disguise the wide range of underlying individual sales.
San Francisco & Bay Area Employment Trends
After dropping a little in the first half of 2016, SF and Bay Area employment numbers jumped back up in the second half, an encouraging sign for the local economy and rents (from the landlord perspective).
Q4 2016 Sales of SF 5+ Unit Apartment Buildings
San Francisco is a unique residential-investment market: the buildings are smaller and older than in most places, built in a wide range of architectural styles. The great majority of the market is under rent control, which makes upside rental-income potential a big component of valuation, even if it is unknown when that potential might be realized. Furthermore, the units are typically very unlike those in suburban garden-apartment complexes, and within the city the variety in units is enormous, from large, gracious, Pacific Heights flats with bay views to studio apartments in Tenderloin brick buildings.
In real estate, the devil is always in the details: If you are interested in further data pertaining to any of the above sales, or regarding properties currently on the market, please contact me.
Landlord-Tenant Economics under Rent Control
A Sample Illustration
Above is a comparison of rent rate appreciation between an average San Francisco rent-controlled apartment leased in 2010 at market rate, and a unit not subject to rent control, leased at the same time, but increased to market rate each year. It illustrates a basic financial issue: There is a lot of money at stake. The difference of approximately $925/month by 2017 equals $11,100 in additional rent per year, which, since there are no tax deductions for rent, would require something like another $15,000 in tenant income to pay. If the rent-controlled tenant moves out in 2017, there is not only the substantial increase in annual revenue for the owner, but, at a conservative gross rent multiple valuation of 14, the property would be worth $155,000 more.
Generally speaking, rent control is more often found in communities with higher percentages of tenant residents (i.e. voters) than owner-occupier residents, which is the case in San Francisco, Oakland and Berkeley.
San Francisco is now in the midst of its greatest apartment building construction boom since WWII, which, among other factors, is causing rents to soften (though they remain the highest in the nation).
Rental Rate Trends
The first chart below is for average and the second for median asking rents,
provided by different sources, which is why the SF rents vary.
Residential Multi-Unit Property Sales
According to Broker Metrics, which crunches MLS sales data, of the largest brokerages in San Francisco for multi-unit residential property sales, Paragon Commercial Brokerage ranks first for highest sales volume (in both 2+ and 5+ unit sales), and highest Closed-to-List ratio.
© 2017 Paragon Commercial Brokerage