Compass Multi-Unit Res-Income Market Report

The Multi-Unit Residential Property Markets
of San Francisco, Alameda & Marin Counties

Autumn 2018 Report

In summer 2018, Paragon Commercial Brokerage merged into Compass.

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California Proposition 10

The big political issue facing the market is CA Prop 10, which, if passed in November, repeals the limits on local rent control laws enacted in the Costa-Hawkins Rental Housing Act. This would almost certainly have negative ramifications for owners of multi-unit residential properties in San Francisco and Oakland. The CA Legislative Analyst Office does a good job summarizing the issues: Prop 10 Review. Prop 10 is currently creating something of a shadow on the larger apartment building market, with some buyers waiting for election results - much as happened with SF Prop G did in 2014. (Prop G failed and the market rallied dramatically after Election Day.) However, the market certainly did not grind to a halt in Q3, nor did values plunge.

Historically speaking, it has been difficult for rent control measures to pass on a statewide basis, because homeowners, all of whom are potential landlords, outnumber tenants in California. On this issue, people tend to vote their financial interests, and homeowners generally vote in higher percentages than tenants. Strong rent-control measures are generally found only in tenant-majority communities. All of which is not to take for granted what will occur on November 6.

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This report generally separates out the 2-4 unit and the 5+ unit apartment building markets, since they have different dynamics and values. All the statistics herein are broad generalities covering a wide variety of buildings of very different location, age, size, quality, condition, tenant profile, income and income potential. The number of sales in many of the segments is relatively small, which can make the statistics more prone to anomalous fluctuations.

Some charts pertain to multiple counties, and others drill down on statistics specific to San Francisco; some track the last 12 months of sales, and others have a final data point reflecting 2018 YTD sales. All numbers should be considered good-faith, general approximations.

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Trends in Residential Rents

This chart below tracks longer-term average asking rent trends, instead of median asking rent appreciation since 2012, as illustrated in the charts above. It provides a bit more historical context.

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Sales, Prices & Market Trends

2-4 Unit Buildings

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5+ Unit Buildings: Inventory, Sales & Values

The inventory of active listings ticked up in the last 2 quarters.

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SF 5+ Unit Buildings: Trends in Gross Rent Multiple,
Cap Rate & Dollar per Unit Value

Many of the standard value parameters have remained remarkably
consistent in San Francisco over recent years.

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San Francisco New Construction Pipeline

Almost 70,000 housing units are now in the SF new construction pipeline. Plans are constantly being added, revised and abandoned, and new housing construction is extremely sensitive to changes in economic conditions.

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Q3 2018 Sales of San Francisco 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. Within the city the variety in buildings and units is enormous.

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It is impossible to know how median and average value statistics apply to any particular apartment building without a specific, tailored, comparative market analysis. Statistics are generalities: This is especially true for multi-unit properties, with the enormous range of property types, sizes, conditions, circumstances, qualities, financial data and locations. We are often dependent upon listing agents for income and expense details, which can be of varying accuracy. A percentage of investment property sales are not reported to MLS, which sometimes limits our ability for more comprehensive data analysis.

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.

© 2018 Compass

Mid-Year 2018 Report
Paragon Commercial Brokerage is now Compass

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This report generally separates out the 2-4 unit and the 5+ unit apartment building markets, since they typically have different dynamics and values. All the statistics below are broad generalities covering a wide variety of buildings of very different location, size, quality, condition, tenant profile, income and income potential. Some of the charts pertain to multiple counties, while later in the report, we drill down on supply and demand statistics specific to San Francisco. Note that some of the analyses track the last 12 months of sales, while others have a final data point reflecting only 2018 YTD sales.

As a political update, Proposition F passed in San Francisco, providing city tenants facing eviction proceedings - for any reason - the right to taxpayer-funded legal representation.

According to an analysis by Socketsite, the SF Accessory Dwelling Unit (ADU) program has so far resulted in 691 permit applications to add 1,244 such units to existing buildings. However, only 179 permits for 306 ADUs have so far been issued, and only 28 ADUs have been completed. 90 permit applications for 151 ADUs were filed in Q1 2018. There has been talk of the Planning Department simplifying the process and easing the requirements for the construction of ADUs, since current regulations have clearly been counter-productive to the goals of the program.

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Bay Area Residential Rents

Bay Area rents historical trends

San Francisco Commercial Rents

Not so long ago, there were worries that a glut in new office buildings would hit market putting downward pressure on office rents, but every new building has had its space snapped up by major high-tech companies. This is pertinent to the apartment rental business since all those office buildings being leased are presumably going to be filled with additional, well-paid employees, maintaining pressure on apartment rents. This will help balance new apartment buildings coming on market as will be discussed later in this report.

Additional Chart: Median List Rent per Square Foot

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Sales, Values & Trends by County & SF District

5+ Unit Buildings

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2-4 Unit Buildings

SF 2-4 Units Median Sales Price Trends

SF2-4 Unit Buildings Average Dollar per Square Foot

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San Francisco Market Overview Trends

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Sales, Values & Statistics by Submarket
from our Q1 2018 report

SF Apartment Bldg Sales by Neighborhood

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Building Cranes Everywhere

Approximately 68,000 housing units are now in the SF new construction pipeline. Consistent with the trends in recent years, the percentage of rental units under construction is higher than for those units intended as condo sales.

Just because a project is in the pipeline does not guarantee it will be built as planned. Plans are constantly being added, changed and abandoned. New housing construction is extremely sensitive to changes in economic conditions.

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Q2 2018 Sales of San Francisco 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 unlike those in suburban garden-apartment complexes, and within the city the variety in buildings and units is enormous.

In real estate, the devil is always in the details: If you are interested in further insight into the details of any of the above sales, or regarding properties currently on the market, please contact me.

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Broker Performance in
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 ranks first for highest sales volume (in both 2+ and 5+ unit building sales). Paragon represents both many more buyers and many more sellers in successfully completed transactions. We also do significant amounts of business in surrounding Bay Area counties.

Link to our latest report on the SF residential homes market

All Paragon market reports can be found here

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It is impossible to know how median and average value statistics apply to any particular apartment building without a specific, tailored, comparative market analysis, which can be provided upon request.

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities: This is especially true for multi-unit properties, with the enormous range of property types, sizes, conditions, circumstances, qualities, financial data and locations. We are often dependent upon listing agents for income and expense details, which can be of varying accuracy. A percentage of investment property sales are not reported to MLS, which sometimes limits our ability for more comprehensive data analysis. All numbers to be considered approximate.

© 2018 Paragon Commercial Brokerage

April 2018, Q1 Report
Paragon Commercial Brokerage

This report will first cover a number of economic issues relevant to the residential income property market - population and employment trends, interest rates, new home construction, and rent rates. The second part reviews market activity trends and metrics such as median sales price, average dollar per square foot, cap rates, gross rent multiples and price per unit. Then, at the end, it will review the sales details of larger San Francisco apartment buildings closing in Q1 2018.

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Migration, Population & Employment

The media has recently been full of misleading articles suggesting that residents have been leaving the Bay Area in huge numbers, with more people leaving than moving in. This is not true. We dove into the hard data in our recent report Will the Last Person Leaving the Bay Area Please Turn Off the Lights and below are 3 of the charts on SF and Bay Area net migration numbers in and out, population growth, and employment trends. The report covers the subject in much greater detail.

The last column for each year tallies net positive migration into San Francisco.
Our full report has a corresponding chart for the SF Metro Area.

San Francisco & Bay Area populations continued to increase in 2017,
though slowing from the feverish growth rates of previous years.

The Bay Area continues to be a job creating machine, though it speeds up
and slows down during certain periods.

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SF New Housing Construction Pipeline

The construction of new rental units continues to outpace new-condo construction in San Francisco, an interesting shift which just began a couple years ago. So far, demand appears to be soaking up new apartments coming on the market without further declines to SF rental rates after the significant drop from 2015 peaks. More projects continue to enter the SF pipeline, but some of the really big projects, such as Treasure Island and Candlestick, do not seem to be making much headway toward breaking ground. Apartment construction in Alameda County has been accelerating rapidly.

San Francisco Housing Pipeline

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Mortgage Interest Rates

This interest rate chart is not perfectly applicable to financing for residential investment properties, but still illustrates recent trends. Interest rates are one of many factors we reviewed in a recent report Positive & Negative Factors in Bay Area Markets.

30 Year Short Term Interest Rates

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Rent Rate Trends & Statistics

AVERAGE Asking Rents: San Francisco
Long-Term Trends since 1994

San Francisco Average Asking Rents by Year

MEDIAN List Rents by County
Short-Term Trends since 2011

Bay Area Rents by County

Median List Rent per Square Foot
by Apartment Size

Bay Area Median Rents per Square Foot

Additional Chart: Median SF List Rents by Bedroom Count

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San Francisco Supply & Demand Dynamics
New Listings & Listings Accepting Offers by Month

The 2018 market got off to a strong start, markedly more active than in the beginning of the last 2 years.

SF Multi-Unit New Listings

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In this report many of the charts will separate out the 2-4 unit and the 5+ unit apartment building markets, since they have somewhat different dynamics and methods of valuation - for example, Gross Rent Multiple and Cap Rate are not typically used for smaller, 2-4 unit buildings, which rely more upon median sales price and average dollar per square foot valuations. When analyzing statistics by submarket, we are sometimes working with a relatively small number of sales, which can lead to anomalous fluctuations. All the statistics below are broad generalities covering a wide variety of buildings of different locations, eras, sizes, qualities, condition, incomes, income upside potential, and expense ratios.

Sales & Values by Submarket

SF Apartment Bldg Sales by Neighborhood

Annual Trends in Values
from our January 2018 report

Chart: Median Prices by Year, 2-4 Units

Chart: Average Dollar per Sq.Ft. by Year, 2-4 Units

Chart: Median Prices by Year, 5+ Units

Chart: Average Dollar per Sq.Ft. by Year, 5+ Units

Chart: Price per Unit by County

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Market Metrics by Submarket

Cap Rates, Gross Rent Multiples & Price per Unit

San Francisco Cap Rates

Historical Trends: Cap Rates, GRMs & $/Unit
from our January 2018 report

Chart: Average Cap Rate by Year, SF 5+ Units

Chart: Average GRM by Year, SF 5+ Units

Chart: Average Price per Unit by Year, SF 5+ Units

Chart: Average Days on Market by Year

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Market Overviews
from our January 2018 report

Chart: 2017 Sales by Price Segment, SF 2-4 Units

Chart: 2017 Sales by Price Segment, SF 5+ Units

Chart: Sales by Building Size

Chart: Sales by Era of Construction

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2017 Sales Breakdown Tables

Table: 2-Unit Buildings Sales

Table: 3-Unit Buildings Sales

Table: 4-Unit Buildings Sales

Table: 5-8 Unit Buildings Sales

Table: 9-15 Unit Buildings Sales

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Q1 2018 Sales of San Francisco 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 unlike those in suburban garden-apartment complexes, and within the city the variety in buildings and units is enormous.

Q1 2018 San Francisco Apt Building Sales

Q1 2018 San Francisco Apt Building Sales

In real estate, the devil is always in the details: If you are interested in further insight into the details of any of the above sales, or regarding properties currently on the market, please contact one of our Commercial Brokerage agents.

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Broker Performance in
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 ranks first for highest sales volume (in both 2+ and 5+ unit building sales). Paragon represents both many more buyers and many more sellers in successfully completed transactions. We also know and do significant amounts of business in surrounding Bay Area counties.

Link to our latest report on the SF residential homes market

All Paragon market reports can be found here

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January 2018 Report - 2017 in Review
Paragon Commercial Brokerage

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Moving into 2018, there are a lot of spinning plates in the air - local, state, national and international factors, both economic and political, that could affect markets. After some cooling from mid-2015 to mid-2016, the Bay Area high-tech economy surged back into high speed, and companies are leasing out enormous spaces in newly built office buildings - which they will presumably fill with new hires, needing apartments to live in. On the supply side, the boom in new apartment construction continues in San Francisco and is now gaining speed in the East Bay: Thousands of new apartments are in the pipeline. Rents appear to have generally stabilized in SF after falling from peaks in 2015 - and they remain the highest in the nation.

Congress delivered an unpleasant holiday present to many Bay Area residents in the form of federal tax law changes limiting the deductibility of mortgage interest and state and local taxes. The effect of these changes make living in an already high cost-of-living area more costly for many residents, and also reduce some of the financial incentives of homeownership. Predictions on the effect of these tax changes on local housing markets and the business environment range from one extreme (economic devastation) to the other (shrug), and the state legislature is currently working on bills that might blunt the negative financial impacts. We will have to wait to see how this plays out.

Congress left the 1031 tax deferred exchange laws basically unchanged, a huge benefit to real estate investors, and other changes to federal tax law could prove to be highly advantageous to investors depending on circumstances. Speak to your own accountant or tax attorney to review your circumstances and options.

An interesting development is the surge in accessory dwelling unit construction in existing SF apartment buildings, which is described in this article. More information can be found on the Planning Dept's website: https://sf-planning.org/accessory-dwelling-units (copy and paste this URL into your search bar as we cannot link to it directly)

We have also updated our report on new housing construction in San Francisco here. A detailed 12-page report on SF construction costs - according to the report, we have the second highest costs in the world after New York - was just released by the Terner Center at UC Berkeley: January 2017 Terner Report

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This report generally separates out the 2-4 unit and the 5+ unit apartment building markets in the 3 counties, since they typically have somewhat different dynamics and values. All the statistics below are broad generalities covering a wide variety of multi-unit buildings of very different locations, sizes, qualities, condition, tenant profiles, incomes, income potential, and expense ratios.

Many of the charts pertain to multiple counties, while later in the report, we mostly drill down on supply and demand statistics specific to San Francisco. In Marin, the limited number of sales sometimes makes meaningful statistical analysis difficult. In the East Bay, gross rent multiple (GRM) and cap rate sales data are often not easily available.

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San Francisco Employment Growth by Year

Bay Area Rents

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Sales, Values & Trends by County & SF District

5+ Unit Buildings

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2-4 Unit Buildings

SF 2-4 Units Median Sales Price Trends

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San Francisco Market Overview Trends

San Francisco Rent Board Charts
Ellis Act Evictions & Tenant Buyouts

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Q4 2017 Sales of San Francisco 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 unlike those in suburban garden-apartment complexes, and within the city the variety in buildings and units is enormous.

In real estate, the devil is always in the details: If you are interested in further insight into the details of any of the above sales, or regarding properties currently on the market, please contact me.

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Broker Performance in
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 ranks first for highest sales volume (in both 2+ and 5+ unit building sales). Paragon represents both many more buyers and many more sellers in successfully completed transactions. We also know and do significant amounts of business in surrounding Bay Area counties.

All Paragon market reports can be found here

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Autumn 2017 Report
Paragon Commercial Brokerage

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This report generally separates out the 2-4 unit and the 5+ unit apartment building markets in the 3 counties, since they typically have somewhat different dynamics and values. When analyzing statistics by submarket, we are sometimes working with a relatively small number of sales, which can lead to anomalous fluctuations. Sudden outsized jumps or declines in median prices or average dollar per square foot values should be taken with a grain of salt until the trend is substantiated over the longer term. All the statistics below are broad generalities covering a wide variety of buildings of different locations, sizes, qualities, condition, incomes, and expense ratios.

Sales & Values by Submarket

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Overview Trends by County

Marin is sometimes excluded from analyses pertaining to larger apartment buildings simply because the number of sales there is often too low for reliable statistics to be generated.

Chart: Sales by Price Segment, SF 5+ Units

Chart: Sales by Price Segment, SF 2-4 Units

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Rent Rate Statistics

According to Zillow, median list rents ticked back up in the first half of 2017, reversing several previous quarters of decline in 2016, but still well down from peaks in 2015: This trend is relatively consistent across Bay Area counties, as well as within San Francisco when looking at rents by unit size. However, the change is still short-term and too much should not be made of it until substantiated over the longer term. Hiring trends, which often drive rent rates, have been fluctuating up and down over the past 20 months, with a general overall plateauing in employment numbers over the time period (after years of huge increases). At the same time, there are still many thousands of new apartments in the construction pipeline in the city.

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Context Economic Factors to Bay Area Housing Markets

We recently completed a report placing the Bay Area housing market within the context of a wide variety of other economic dynamics, such as population growth, employment and hiring, the stock and the IPO markets, consumer confidence, interest rates, commercial lease rates, housing affordability and new housing construction. Because conditions, trends and cycles seen in housing markets and in these other fundamental economic realities are, more often than not, tied together quite closely. The full report is online here: Economic Context Report.

More analyses specific to the Bay Area apartment building market are below.

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Market Metrics by County & San Francisco Submarket

Cap Rates, Price per Unit & Days on Market

San Francisco Trend Overviews

These 3 charts below for the overall SF market, from our mid-year report, give additional context to the submarket metrics illustrated above.

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San Francisco Supply & Demand Dynamics
Active Listings, Listings Accepting Offers & Seasonality

As of 10/2/17, there were 107 active 2-4 unit building listings in San Francisco with 43 listings pending sale (offers accepted but not yet closed sale). In the SF 5+ unit building market, there were 29 active listings with 28 pending sale (a relatively high number). These two charts illustrate the size of the SF multi-unit markets in any given month, and how market activity ebbs and flows by season. In mid-November, local real estate markets usually plunge in activity until picking up again in February and March.

Sales Price to List Price Percentages, Days on Market,
Price Reductions & Expired Listings

This chart below illustrates different reactions to properties that the market deems fairly priced or priced too high: Some listings sell quickly for over asking price; some must go through one or more price reductions to sell after a much longer time on market; and some do not sell at all, but are pulled off the market because of buyer indifference. Though this chart is specific to San Francisco multi-unit buildings, the same basic trends are found in every county and every segment of our real estate markets.

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Q3 2017 Sales of San Francisco 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 buildings and units is enormous.

Sales reported by 10/2/17. Data from sources deemed reliable but may contain errors
and subject to revision. May not contain every sale occurring in the period.

In real estate, the devil is always in the details: If you are interested in further insight into the details of any of the above sales, or regarding properties currently on the market, please contact us.

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Long-Term Appreciation Trends: 3 Major SF Districts

These 3 charts review the 2-4 unit building markets in three broad sections of the city: The very expensive, northern district encompassing the greater Pacific Heights area; the central Noe, Eureka & Cole Valleys district; and the Richmond district in the northwest corner of the city. We use the 2-4 unit building markets because the greater quantity of sales makes the statistics much more meaningful.

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Broker Performance in
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 ranks first for highest sales volume (in both 2+ and 5+ unit building sales). Paragon represents both many more buyers and many more sellers in successfully completed transactions. We also know and do significant amounts of business in surrounding Bay Area counties.

All Paragon market reports can be found here

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It is impossible to know how median and average value statistics apply to any particular apartment building without a specific, tailored, comparative market analysis, which can be provided upon request.

Numbers reflect sales reported by 10/2/17. These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities: This is especially true for multi-unit properties, with the enormous range of property types, sizes, conditions, circumstances, qualities, financial data and locations. We are often dependent upon listing agents for income and expense details, which can be of varying accuracy. Many Alameda sales do not report cap rates, so the calculation in this report is based only upon those that did. A percentage of investment property sales are not reported to MLS, which sometimes limits our ability for more comprehensive data analysis. All numbers to be considered approximate.

© 2017 Paragon Commercial Brokerage

The Multi-Unit Residential Investment Property Markets
of San Francisco, Alameda & Marin Counties

Mid-Year 2017 Report, Paragon Commercial Brokerage

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Before jumping into the specific financial metrics pertaining to the market itself, below is a review of some of the major economic context issues which underpin the market: rent rates, new construction and employment.

Bay Area Rent Rate Trends

San Francisco still has the highest rents in the nation (the light blue columns in the first chart above), exceeding even Manhattan (in second place, delineated by the dark blue line), but they have been dropping since recent peaks in late 2015/early 2016. Generally speaking, rents around the Bay Area have either declined, in what had been the hottest markets, or seen their appreciation rates significantly slow, over the past year or so.

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New Construction in San Francisco

Approximately 64,000 housing units, 31 million sq.ft. of commercial space
& 25 hotels with 4685 rooms are now in the SF new construction pipeline -
with 5700 units, 10 million sq.ft. and 5 hotels currently under construction.

With a lot of help from the recent San Francisco Business Times analysis and investigation of the SF Planning Department Pipeline report, we put together the two charts above. As far as the SF apartment building market is concerned, the big issue is the continued construction of new rental units, how that is affecting the supply and demand dynamic, and rent rates. Over 8000 new rental units have been built in the past 5 years, with at least 10,000 more expected to hit the market in the next 5. This surge of supply is a major factor in the recent decline in SF rents illustrated at the top of this report.

Note that projects are continually being added to the pipeline, or their plans significantly changed, or even abandoned. Some of the big projects noted are very long-term, and economic and political shifts can dramatically affect future plans, sometimes very quickly.

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Employment Trends

Ted Egan, chief economist for San Francisco, put it succinctly, Since 2016, a slowdown in tech employment has been driving a slowdown in total employment. This has been occurring both in San Francisco (first chart above) and in the Bay Area (second chart). Adding substantial new apartment construction to a slowdown in hiring is something of a double whammy putting downward pressure on rents. However, in the first half of 2016, employment numbers also fell, only to surge back into positive territory in the second half. Much is currently going on in the high-tech economy and it is not wise to jump to definitive conclusions or predictions based on short-term trends.

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Generally speaking, across a variety of statistical measures, there appears to be some cooling in the 5+ market in SF from the feverish markets of recent years. Alameda, where prices are much lower, remains quite hot. The 2-4 unit market, which typically follows the general residential home market more closely, saw strong buyer demand this past spring. (Residential markets hit new highs in median home sales prices around the Bay Area.)

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 or the absence of critical financial data in Alameda, some of the year-to-date analyses were not performed for those counties.

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Average Dollar per Square Foot Trends

The analyses linked to below, from our previous quarterly report, review values by San Francisco neighborhood submarkets:

Chart: Median Sales Prices by City District

Chart: Average Dollar per Sq.Ft. Values by City District

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San Francisco 5+ Unit Market Dynamics

Cap Rates, Gross Rent Multiples & Price per Unit

By all three of these measures, the heat of the SF 5+ unit apartment building market ticked down in the first half of 2017. However the changes are relatively small and end of the year data will be more conclusive.

These analyses below, from our previous quarterly report, illustrate these statistics by city district:

Chart: Cap Rates by City District

Chart: Gross Rent Multiples by City District

Chart: Price per Unit Values by City District

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San Francisco Sales Breakdowns

12 Months Sales by Building Size & Price Segment

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Interest Rates

Besides the enormous overall increase in rents since the end of the recession, the other major factor underpinning the investment real estate market has been the extremely low interest rates. This chart graphs residential mortgage rates, which don’t apply perfectly to rental properties, but which indicates the trends that apply to both markets. No one has consistently predicted interest rate movements correctly in the past 10 years, but if significant increases do occur it will certainly affect the financial scenario for the purchase and ownership of residential income properties.

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Supply & Demand

The inventory of 5+ listings on the SF market has increased a little over the past year, but not significantly. However, as charted below, Q2 saw a sudden spike in listings going into contract. Q2 5+ numbers are as follows: 43 new MLS listings, 91 total listings on the market, 56 went under contract, and 43 closed escrow.

The 2-4 unit market in the city, which we did not chart, saw 178 new MLS listings come on market in Q2, a total listing inventory of just under 300, 131 listings went under contract, and 109 closed escrow.

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Q2 2017 Sales of SF 5+ Unit Apartment Buildings

San Francisco is a unique apartment building 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 unlike those in suburban garden-apartment complexes, and within the city the variety in units is enormous, from large, gracious, full-floor flats in Russian Hill and Cole Valley, 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 us.

IRC 1031 tax exchange endangered? Numerous recent news articles in the likes of The Wall Street Journal, Washington Post and Forbes have mentioned the possibility that the current congress is eyeing the possibility of doing away with the 1031 tax deferred exchange, which would have significant, negative ramifications for real estate investors: The tax deferred exchange plays a critical role in sales volume and in portfolio development. Of course, there has been talk of this on and off for years, and has always come to nothing. How serious the threat is now, we cannot say, though it seems an odd change to occur under a President who is a real estate mogul.

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Broker Performance:
Residential Multi-Unit Property Sales

According to Broker Metrics, which crunches MLS sales data, whether looking at the market in San Francisco or for all of San Francisco, Alameda and Marin counties, Paragon closes more residential income property sales than any other brokerage.

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These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities: This is especially true for multi-unit properties, with the enormous range of property types, sizes, conditions, circumstances, qualities and locations. 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. Many Alameda County sales do not report cap rates, so any calculation in this report is based only upon those that did. Marin County often has too few sales to generate meaningful statistics. A fair proportion of investment property sales are not reported to MLS, which sometimes limits our ability for more comprehensive data analysis. When we identify outlier sales that we believe distort the statistics, these sales are typically deleted from the analysis. For all these reasons, any numbers in this report should be considered approximate.

© 2017 Paragon Commercial Brokerage

April 2017, Spring Report

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Annual Trends in Values:

Chart: Annual Median Price Trends, 5+ Units
Chart: Annual Median Price Trends, 2-4 Units
Chart: Annual Dollar per Square Foot Trends, 5+ Units
Chart: Annual Dollar per Square Foot Trends, 2-4 Units

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Market Sales Overviews

Chart: 2016 Sales by Price Segment, SF 5+ Units
Chart: 2016 Sales by Price Segment, SF 2-4 Units
Chart: Marin Overview, 2010-2016

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Rent Rate Statistics

According to Zillow, median list rents ticked up in early 2017 from the 4th quarter of 2016, reversing previous quarters of decline, but still well down from 1 year ago. However, the data is still too short-term to jump to any strong conclusions and we will provide updates as more data becomes available. For the past year, San Francisco rents, in particular, have been under significant downward pressure from the large surge of new apartment units coming on market, and reports from the field paint a relatively clear picture of increasing supply and some softening of demand in comparison to the frenzy of previous years.

San Francisco still has the highest median list rent in the nation, though New York has higher median rental dollar per square foot values in 2 of the 3 categories delineated in the second chart below.

Note: There are different ways of measuring average and median rents, and, frankly, none of them is definitive: They are usually based on advertised rates or relatively small samples from selected properties, as determined by different analytic firms or rental websites. Still, whoever is doing the analysis, longer-term trend lines usually tend to more or less paint similar pictures of the rental market.

This next chart looks at Weighted Average Asking Rents (another method of analysis) for Q1 of each year for a longer-term perspective. Q1 2017 estimated based on available data.

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Valuation Metrics by County & San Francisco Submarket

Cap Rates, Gross Rent Multiples & Price per Unit

Preliminary indications in San Francisco are that cap rates are starting to tick up a tiny bit, and gross rent multiples are starting to tick down a bit, albeit from peak levels reached after 5 years of extremely strong markets. Cap rates in Alameda County, for the time being, appear to still be moving lower, but yet remaining significantly higher than in the city or in Marin.

Annual Trend Overviews:

Chart: Annual Cap Rate Trends
Chart: Annual SF Gross Rent Multiple Trends

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San Francisco Market Dynamics
Annual Trends, 2010 - 2016

In each of these four statistical measurements of market heat, there is an indication of some degree of market cooling occurring in the San Francisco multi-unit markets in 2016. However, so far, the changes are generally relatively small and not wholly consistent across the different building types measured.

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Long-Term Appreciation Trends in 2 Major Areas
of San Francisco

Looking at the 2-4 unit markets in two broad sections of the city, the northern prestige neighborhoods and the highly sought-after central Noe, Eureka & Cole Valleys district, indicates continued dollar per square foot appreciation in 2016. We use the 2-4 unit markets because the greater quantity of sales makes the statistics more reliable.

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San Francisco Rent Board Statistics

Charts on Eviction Filings and Tenant-Buyouts
from the SF Rent Board Website

Total Eviction Notices Filed, by Year

Owner Move-In (OMI) Eviction Notices, by Year

Ellis Act Eviction Filings, by Year

Tenant Buy-Out Agreements Filed
(Required only recently)

Tenant Wrongful-Eviction Reports, by Year

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Q1 2017 Sales of San Francisco 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 buildings and units is enormous.

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San Francisco Bay Area Apartment Building Market

For San Francisco, Alameda & Marin Counties
January 2017 Report, Paragon Commercial Brokerage

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 most 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).

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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 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.

Median Sales Price Trends by County

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Average Dollar per Square Foot Trends

These analyses below, from our previous quarterly report, review values by San Francisco neighborhood submarkets:

Chart: Median Sales Prices by City District

Chart: Average Dollar per Square Foot Values by City District

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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.

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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:

Chart: Cap Rates by City District

Chart: Gross Rent Multiples by City District

Chart: Price per Unit Values by City District

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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.

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San Francisco Sales by Price Segment
Approximate Number of Sales by Building Size

Median sales prices disguise the wide range of underlying individual sales.

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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).

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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.

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Rental Rate Trends

The first chart is for average and the second for median asking rents,
provided by different sources, which is why the SF rents vary.

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Broker Performance:
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.

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San Francisco Bay Area Apartment Building Market

For San Francisco, Alameda & Marin Counties
Q3 2016 report by Paragon Commercial Brokerage

Generally speaking, the residential investment property market in 2016 YTD has been an extension of the one in 2015. Cap rates and gross rent multiples have been stable. Depending on the specific segment, values have either been steady or ticked up year over year. The SF inventory of larger apartment buildings for sale hit a 3-year high in Q3 but sales have also increased, while in Alameda County a significant drop in multi-unit listings have led to a decline in sales volume.

San Francisco has been experiencing the biggest delivery of new rental housing units to the market in a very long time, most of them at the most expensive end of the scale, which has been one factor in an apparent decline in average rent rates in the city. (Marin & Alameda rents have continued to climb slightly year-over-year.) After a decline in the first half of the year, hiring surged once again in the northern Bay Area, which is a positive development for continued demand for rental housing. Last but not least, interest rates remain extremely low, which makes real estate investment appealing on a number of fronts.

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Median Sales Prices & Average Dollar per Square
Foot Values by Submarket

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Cap Rates, Gross Rent Multiples
& Price per Unit by Submarket

Note that the quantity of sales in any given local submarket is usually relatively small and/or the number of sales that report the necessary financial information can be limited. Buildings of different ages, qualities and sizes with different tenant profiles, income generation, and income upside potential, selling in different periods can cause these average and median figures to fluctuate significantly. Furthermore, the reliability of some of these calculations depends upon the quality of the income and expense figures provided by the listing agents, and sometimes instead of actual numbers, much less meaningful projected or scheduled figures are used. Therefore, the above statistics should be considered very general indicators, and how they apply to any particular property without a specific comparative market analysis is unknown. If you would like such a specific analysis, please contact me.

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Other Selected San Francisco Market Snapshots

Many more analyses of longer-term trends regarding price appreciation and other market statistics can be found in our mid-year report:Historical Trend Analyses for SF & Bay Area Apartment Markets

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Below is our Q3 2016 list of 5+ unit apartment building sales. For sales in previous periods:San Francisco Apartment Building Sales.

If you are interested in detailed sales data for other Bay Area markets, or for 2-4 unit building sales in San Francisco, Alameda or Marin, please contact us.

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Add New Units to Existing SF Apartment Buildings?

According to an excellent article in the San Francisco Business Times by Roland Li, the largest landlord in San Francisco, Veritas Investments, is hoping to take advantage of the recently enacted accessory dwelling unit program to create approximately 200 new apartments out of basements, attics and storage rooms in existing properties. Considering the cost and regulatory hassle of constructing new buildings, the income generation potential of additional units, and the price-per-unit values in San Francisco (now averaging over $450,000/unit), if the program works as hoped, it could be an exceedingly attractive financial proposition for current owners, while adding desperately needed housing units to city supply. However, as the CEO of Veritas said, It remains to be seen if this is really viable.

The city has published a long, detailed, somewhat daunting guide to the program.

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Probably the Biggest Boom in Market-Rate
Apartment Construction since WWII

The main era of SF multi-unit, apartment building construction ran from 1900 to 1970 (which is why the vast majority of such properties fall under SF Rent Control), with most of them built before 1940. Once the condo era dawned about forty years ago, construction of market-rate rental housing virtually stopped in San Francisco until just a few years ago, when the huge appreciation in rents, to the highest in the country, got investor-builders salivating again. Now, the city is probably seeing the biggest surge in such construction since WWII, with thousands of units added in the last 3 years, a final tally of about 5000 estimated for 2016, and approximately 8,000 to 10,000 currently expected to be completed by 1920. (And then there are the huge, long-term projects planned for Treasure Island, Park Merced and Candlestick/ Shipyard.)

For the first time in 75+ years, market-rate rental housing construction is outpacing new home construction intended for sale. However, because of the high cost of construction, the immense hassle-factor and the length of time it takes to build in San Francisco, plus the normal desire of investors to maximize profitability, virtually all the new market-rate apartments are at the very highest end of rental cost.

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Employment Trends

What has been supercharging the Bay Area rental market during the recovery since the last recession has been the incredible increase in new jobs, estimated at over 600,000 in the Bay Area, and 100,000 in San Francisco alone. This has put enormous pressure on rents throughout the metro region as new hires, many with very well paying jobs, desperately searched for housing. Then in the first 6 months of 2016 the trend in hiring slowed and reversed as the high-tech boom appeared to cool, just as new rental housing inventory was hitting the market in quantity. However, the situation changed again in mid-summer, with a sudden, dramatic surge in new hiring. It remains to be seen if this will turn out to reflect the beginning of a sustained second wind in new employment generation (and perhaps for our local high-tech boom) or simply a surprisingly large short-term fluctuation.

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Rental Rate Trends

Tracking changes in rent rates is always challenging, because unlike real estate sales, newly negotiated lease rates are not reported to or recorded by any central authority. Still, including the substantial incentives that many of the large, new apartment buildings have been offering to get their units filled (free month of rent, and so on), most of the firms that track such data agree that residential rents in San Francisco, after 5 to 6 years of feverish appreciation, have been declining in 2016. RealFacts data, used in the charts above, estimates a 3.4% year-over-year decline - we suspect that the decline is showing up mostly, if not exclusively, at the high end of the rental market where all the new-construction inventory is concentrated. Alameda and Marin Counties are still showing year-over-year increases in the 2% to 3% range, which reflect a very significant slowing from the torrid appreciation rates of recent years (which could run as high as 15% to 23% depending on the county).

For further context, this chart below, using Zillow data, looks at median 1-bedroom apartment rents in selected Bay Area counties and metro areas around the country. Even with the recent decline, San Francisco heads the list for highest rents, and other Bay Area counties dominate the top end of the list.

Our report on rental market trends is here:Bay Area Rent Report

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Broker Performance:
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, lowest average days on market, and highest Closed-to-List ratio.

This report contains only a sampling of the market data we have available.
Please contact us with questions or if we can be of assistance in any other way.

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San Francisco Bay Area Apartment Building Market

For San Francisco, Alameda & Marin Counties
1st Half 2016 report, including 16 custom charts

Financial markets worldwide have seen dramatic volatility in this past 12 months, the Bay Area economy and new hiring have cooled, and the San Francisco house and condo market started to normalize after 4 feverishly overheated years. From a wide variety of sources, we are hearing of a big jump in apartment vacancy rates, with more apartments for rent than in many years, and the beginning of a decline in rent rates from recent all-time peaks. As would be expected, preliminary indications of a transition to a cooler market appear to be starting to show up in apartment building sales activity, but as illustrated in the charts below, no significant change is yet showing up in the statistics. The second half of 2016 will undoubtedly provide more insight regarding the speed and scale of any changes in market conditions.

Generally speaking, in the analyses below, we break out the 2-4 unit market from the 5+ unit market, as the two have some fundamental differences in market dynamics. The smaller buildings are often purchased by owner-occupiers, or, in San Francisco, by investors planning to sell the units separately as TICs. This significantly changes the financial evaluation of such properties.

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This first chart gives an idea of the sizes of the markets in San Francisco, Alameda and Marin Counties.

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Median Sales Price and Dollar per Square Foot Trends
2-4 Unit Buildings: San Francisco, Alameda & Marin
2011 to 2016 YTD

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Cap Rate & Average Dollar per Square Foot Trends
5+ Unit Buildings: San Francisco, Alameda & Marin
2012 to 2016 YTD

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Price per Unit, Gross Rent Multiples, Median Price Trends
5+ Unit Buildings: San Francisco Only
2007 to 2016 YTD

Further information regarding San Francisco neighborhood submarkets can be found in our last 2 reports: Q1 2016 & 2015 Market Reports

Below is one section of our list of 5+ unit apartment building sales reported to MLS in the first half of 2016. The full list is here: San Francisco Apartment Building Sales

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Inventory, Demand, Price Reductions & Expired Listings
Multi-Unit Residential Buildings in San Francisco

As seen in the second chart above, most of the SF multi-unit buildings that closed escrow in the first half of 2016 sold relatively quickly and averaged 5% over the original asking price. Buildings that went through price reductions before selling took much longer and sold at significant discounts. And quite a few listings expired or were withdrawn without selling, a clear indication of a substantial disconnect between what many sellers wanted and what buyers were willing to pay.

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San Francisco Housing Inventory & Era of Construction

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San Francisco New Housing Construction Pipeline

One of the big dynamics playing out in both the SF residential home and residential investment markets is the large number of new housing projects that have recently come on market or expected soon. Note that of projects under construction or approved by Planning (and leaving aside the long-term mega-projects such as Treasure Island), rental units outnumber condo (sale) units by about 2 to 1. This is a very recent development in SF housing construction, which saw virtually no market-rate rental housing construction for decades. (See era of construction chart above.) This expected rush of new rentals, most of which are at the (very) high end of rental cost, is coming just as the rental market is clearly softening in the city.

The chart above is based upon the San Francisco Business Times superb in-depth analysis of the many housing projects, rental and sale, market rate and affordable, currently in the Planning Department new construction pipeline, mapping and describing major projects of 60 units or more. Our chart attempts to summarize some of their data. Please note that projects are constantly being added, revised, sold to new developers, or even abandoned, and the median time from filing a plan to building completion is 3 to 6 years depending on the size of the project. Our full report is here:SF Housing Inventory and Pipeline Report.

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Changes in San Francisco Employment Trends

What has been supercharging the Bay Area rental market for the past 5 years has been the incredible increase in new jobs, estimated at over 600,000 in the Bay Area, and 100,000 in San Francisco alone. This has put enormous pressure on rents throughout the metro region (the most expensive in the country) as new hires, many with very well paying jobs, desperately searched for housing. However, since 2016 began, it appears that the trend in new hiring has reversed, just as new rental housing inventory has been hitting the market in quantity: Significantly less demand, extremely high rents and increased supply of apartments for rent is creating a new reality, at least for the time being. The most expensive segment, especially in those areas where new construction is clustered, is probably most affected: Almost all the new, market-rate inventory is concentrated in the highest price ranges.

Our report on rental market trends is here: Bay Area Rent Report

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Broker Performance: Residential Multi-Unit Sales

Paragon Commercial Brokerage Listings

Please contact me with any questions or if I can be of assistance in any other way.

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate. Properties not listed on or reported to MLS are not counted in these statistics, though they often affect market dynamics. Sales statistics of one month generally reflect offers negotiated 6 to 8 weeks earlier.

© 2016 Paragon Commercial Brokerage