Multifamily property sales prove a growing market in the East Bay
By Grant Chappell
In wrapping up another strong year on multifamily property sales, the numbers show that the market is still pushing higher. Alameda, Berkeley and Oakland all posted strong numbers on activity, total volume and average sales price.
Since mid to late 2012, we have consistently reported that the market clearly had turned, and the worst was behind us. Fierce competition on market deals continues to push bids over the asking price – a practice traditionally less common in the 5+ unit segment.
Historically low interest rates and the perception of higher rents on unit turnover seem to justify the low cap rates paid all over the Bay Area.
Al Stephens, a veteran broker and property owner, views this practice as “rolling the dice” when obtaining a 5-year fixed loan in acquiring a property. Low rates are also a catch-22 for owners with adjustable loans, because payments are lower than a fixed rate on today’s rates. A fixed rate loan on a 5+ unit property will entail a penalty to pay it off early or before the fix rate period expires. With values still rising and rents strong, there are compelling reasons to sit back and “see what happens” with respects to interest rates and property values.
In speaking to Nils Ratnathicam of The Rincon Group, an independent commercial real estate banking firm, he sees more options for property owners in 2014.
“The trend so far in 2014 has definitely been the influx of new multifamily lenders into the Bay Area and Los Angeles markets,” Ratnathicam said. “These markets have been hyper-competitive for a few years now, so it’s been interesting to see the creative terms and features these new lenders are offering to earn business and market share.”
Whether that means lenders are more aggressive on debt coverage ratios, loan to value or interest rates, clearly many banks want a bigger piece of the market.
Compared to other parts of Northern California, the Bay Area continues to attract capital from around the world.
I recently spoke with Eli Cohen, a principal at Cohen Rojas Capital Partners, a private investment firm with holdings all over Northern California, about their take on the market in Northern California.
“As distressed opportunities are few and far between in Sacramento, we shifted our strategy to the East Bay in the last 18 months, primarily picking up value add assets in Berkeley and the walkable neighborhoods in and around downtown Oakland,” Cohen said. “While rent growth has been sluggish at best in Sacramento, we have seen our rents in the East Bay pick up, along with the quality of tenants we are able to attract.”
According to Property Radar, Notice of Defaults are down 33% from a year ago in Alameda County and down 44% over the same period in California. Notice of Trustee Sales are down 70% in Alameda County over the last year and approximately 60% over the same period in California. Finally, REO inventory is down about 32% in Alameda County over the last year and down about 53% in California.
2 – 4 Units
In Oakland, we saw the average price increase by 20% from $399,000 in Q4 of 2012 to $477,000 in Q4 of 2013. Even more remarkable, the number of transactions increased to 122, compared to 112 a year ago, and up 20% compared to last quarter.
When I first started writing this column back in 2006, it was normal to see stagnant or declining activity going from Q3 to Q4. Aside from 2011, every year since 2008 has bucked this trend and seen activity increasing to finish the year.
In Berkeley, the average sales price jumped about 12% to $827,000 from $739,000 a year ago, and a slight dip from $850,000 last quarter. Strikingly, Berkeley saw a big increase in number of transactions in Q4 of 2013, recording 34 property sales, compared to 21 a year ago and 19 last quarter.
We saw one of the highest sales in the last year on a 4-plex at 2712 Stuart Street, selling for $2,050,000. Comprised of four 4-bedroom, 2-bathroom units and not subject to rent control due to 1988 construction, this demonstrates a “flight to quality” for assets in core markets.
In Alameda, we saw a slight dip in transactions with 11 properties trading hands, compared to 14 in Q4 of 2012 and 13 last quarter. The average increased nearly 28% to $684,000 from $536,000 a year ago, and a minor decrease from $697,000 last quarter. Similar to Berkeley, a few high sales north of $1 million dollars will skew the average price. As you will read below, the market 5+ unit properties in Alameda has drawn substantial attention from investors.
In Oakland, total volume decreased approximately 15% to $39,600,000, compared to $46,350,000 a year ago. This is an even larger drop of 25%, compared to the $51,975,000 last quarter. We saw almost no change in price per unit at $107,000, and about a 10% increase in price per square foot compared to a year ago. Compared to last quarter, we were down 3% on price per unit and 12% down price per square foot.
I reacted positively to these figures initially, as the last two quarters very closely mirrored 2012’s Q3 and Q4 figures, when the expiration in federal capital gains rate was due to expire. I sense many owners are seeing prices at which they are happy to sell, in spite of capital gains, as prices are much higher than 2011 and 2012.
In Berkeley, total volume substantially increased by 50% to $22,465,000 from $12,600,000 a year ago. Price per unit also increased about 20% to $192,000 per unit. Berkeley also saw modest increases in price per square foot, to $267 per square foot, compared to $236 per square foot a year ago.
Three properties traded north of $300 per square foot, and one just over $500 per square foot. A 25-unit building at 2747 Haste, directly across from the Berkeley campus, sold for about $276,000 per unit and $325 per square foot, but also in the neighborhood of 15 – 16 GRM on actual income at time of sale. I give a range, as there were some vacancies at time of sale and upside in utilizing common area for additional income.
A building at 2537 Fulton Street sold just above $500 per square foot and $361,000 per unit, further attributing to the all-time highs we are seeing on both 2 – 4 unit and 5+ unit segments in Berkeley. The building on Fulton Street was completely gutted, fully remodeled and seismically retrofitted. It truly was an impressive project and reflects the high demand for assets near the Berkeley campus.
In Alameda, there was a dramatic jump in volume of nearly 237%, with $16.5 million in sales, compared to 6.9 Million a year ago.
Just over $10 million in sales was allocated to two transactions: 1704 Central Avenue (30 units) and 400 Marion Court (20 units). Both of these properties traded at just over $200,000 per unit and in the high $200 per square foot to low $300 per square foot range. There was also a 30% jump in average price per unit to $175,000 and a 20% increase in average price per square foot to $244.
The Future of the Market
Moving forward, I continue to maintain my excitement for where the sales market is heading. Tight inventory of properties for sale and low interest rates will continue to push values higher.
1031 buyers faced with paying higher capital gains will continue to accept lower returns on properties. Competition for existing buildings will remain fierce until more inventory in the form of new units hit the market, or demand for existing housing wanes.
Until then, we are likely in for another exciting year of record sales.
Grant Chappell is the Vice President
of NAI Northern California. He can be
reached at email@example.com