Earlier in the month, NAI NorCal’s Berger Mandel Associates team sent out a survey to multifamily owners and investors in an effort to better understand market conditions and market sentiment. We received a high number of responses—thank you to everyone that took the time to participate!
Rent collections remain high—83.7% of respondents reported better than 90% rent collections since March. This is consistent with the feedback that we have received throughout most markets in the Bay Area. Most attribute the strong rental collections to the passage of the CARES Act, providing federal stimulus and a $600 per week bonus to unemployment benefits. This thesis seems to be supported when looking at areas with a high concentration of tenants without Social Security numbers; collections in these areas for March and April were generally normal, but have dropped since then, with total collections now ranging 50-70%.
Only 20% of respondents indicated that new lease-ups were either slightly lower or significantly lower than the preceding six months. As reported by CoStar and SocketSite, San Francisco asking rents are down between 5-15% from pre-pandemic levels, with the city’s high-end rentals seeing the biggest decline. The East Bay’s rental market has held up much better, with asking rents down only 1.5%. Relative affordability has helped the East Bay market remain stable, since average rents are 35% cheaper than San Francisco and 20% cheaper than San Jose. As tenants have greater flexibility to work remotely and not in a central office, the East Bay should remain an attractive option for renters.
Some of the many factors putting downward pressure on San Francisco rents include:
- Affluent tenants buying and renting houses in suburban markets: statistics generated by BridgeMLS comparing February 2020 to June 2020 show an increase in the average home price in Alameda and Contra Costa Counties of 5.6% and the number of total closed transactions increasing by 51.7%.
- Tenant migration: movement away from urban cores.
- Biological concerns living in more densely populated areas.
- Tenants’ desire to have control over the immediate living environment and common-area space.
- Fatigue from confinement to smaller living spaces with limited outdoor space.
- Housing consolidation: multiple adults in one unit.
- Boomerang kids: tenants in their 20s moving back in with their parents.
In regards to the sales market, multifamily transaction volume is down; this is not a surprise given that most of the East Bay was under shelter-in-place orders for the majority of the second quarter. According to Costar, during the first and second quarters of 2019 in Contra Costa and Alameda Counties there were a total of 177 five-plus-unit multifamily properties sold, totaling 5,454 individual units, and $1.1B in total sales volume. For the same time period in 2020, there have been a total of 105 properties sold, totaling $1B and 3,367 units—however, $700M of the total sales volume was completed in Q1.
The decrease in transaction volume aligns with the responses we received in regard to planned market activity. Approximately 81.5% of respondents indicated that they would take a wait-and-see approach before deciding to buy or sell. We are seeing an increasing disconnect between buyer and seller expectations. Sellers don’t feel that properties should be discounted, as the income generation and economic performance has remained consistent, but buyers remain concerned with the potential for contracting rents and increased vacancy and feel that values should reflect the potential downside risk. There is also a segment of investors that feel that distressed properties will eventually enter the market and provide opportunities to purchase at a discount.
The capital markets have continued to improve. While many lenders have come back to the market, most are still requiring impounds for reserves of 6-12 months. LTVs on purchases are 60-65% for most assets, and rates for five-year money are in the mid-to-low 3% range with 10-year debt under 4%. Historically low rates are helping to keep buyer demand constant and reasonably strong.
The Berger Mandel Associates team prides ourselves on being a resource for multifamily owners and investors, and we encourage you to reach out with any questions regarding the rental and sales market. We wish everyone good health and safety and hope to connect with you soon.
