Real Estate Investor · San Ramon, CA · Member since 2014 · 67 posts · 28 votes
My tenant decided to move out from my rivermark condo in santa clara . I used to easily find tenants for $2700 ( 1 bed , 1 bath) . However its been 2 weeks and inspite of me lowering rents to $2350 I am not even getting a inquiry . for the first time i have posted on multiple forums zillow,zumper instead of my regular craigslist ad .
I had seen it in the news but experiencing first hand is convincing .
Though i am not happy about it, the prospect that rents are collapsing made me excited about the buying opportunity in multifamily that is coming in bay area . At this rate by December NOI and valuations should drop by 25% . Any thoughts ? I don't see much excitement about it in the forums yet .
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
6y
Sid, I look at OM's for bay area apartment buildings everyday and as much as I want values to decline and metrics to compress so that I can buy, I am not seeing a significant decline in values or NOI's at this time. There are a few reasons for this, first is that depending on the city, rent control has kept rents low so many times a turnover of a unit will actually increase NOI and gross rents even during these times. These mom and pop apartment buildings are older stock now also subject to state wide rent control and many are mismanaged with below market rate rents so turnover is a net benefit to them as well. I also look for value add buildings so rent roll would be far below market anyway and not affected by declining rent. Through my network and reviewing OM's, I am not seeing much COVID hardship with tenants so NOI's havent fallen that much due to it. Finally, good buildings fairly valued are still being purchased quickly, with low interest rates as investors are searching for yield and taking advantage of debt in the 3s and even in the 2s in some rare instances.
Those buildings not subject to rent control are new construction apartment buildings which has rents all at market rate before COVID and I know those are hurting in SF now. So your logic actually applies to a REIT like Avalon Bay who owns new construction buildings with no rent control and pushed rents considerably higher in the past years with a stock that now trades 36% lower than pre COVID. Your logic also applies to a building that has previously all market rate rents but those are rare and usually not the greatest purchase because there is no value add component.
However, real estate does not move as fast as the stock market so I think there will be some opportunities in the future but not as significant as your line of thinking. There has been some price declines on older buildings in SF but they started off with high listing prices and are coming back down to earth. There are still deals to be had and I know investors still picking up assets at great prices. They are not day one cash cows but that is not the play here in the bay area anyways.
Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
5y
We just had a 3 Day Virtual Expo for The California Association of Realtors that ended yesterday. Long story short August of 2021 is the "predicted" start of the correction from a noticeable standpoint. Not saying it will be like 2006-2008, but that's the timeframe.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
5y
The SF rental market is very tricky now, and frankly has been hard to pin down. March-May was weird as we went into initial lockdown and nobody knew what the hell was going on. Then it improved a bit in the summer. And as of September it has gotten a lot worse. A big part I think is SF LL’s are/were in denial, and now some are getting more desperate and hence number of listing is up. (Personally I’m glad I dropped my rents as needed and got everything taken care of by late summer ;)
The other factor is that rent drops are highly dependent on location and unit/bldg type. High rise fancy condos in CBC are definitely down big time. Other neighborhoods are case by case. For example, I took a big hit on a 3BR rental in the mission, but only minor rent drops on my 3BRs in Bayview (which is more of an up and coming neighborhood.)
As for predictions, my crystal ball says: this winter we will reach nadir, and hopefully things will bottom and stabilize by spring/summer 2021. Then depending on a lot of things like vaccine, elections, economy, rents will start to slowly improve in 2022. This is for SF rentals only.
@Brian Garlington, thanks for the insiders info. Correction down I assume? Is this backed by objective indicators?
Some people that talk about correction mention earlier time frame, Q1 21 for the most part, and the reasoning is mostly the large numbers of sellers who are currently on the fence (and won’t be able to wait much longer).
It also references a Realtor.com September rent report that I thought was interesting. It breaks down the top 10 markets across the country that are seeing rent decreases, and increases, by number of bedrooms. (SF is #1 for rent decreases in each category they reported on.) Anyway, here’s that report:
Real Estate Investor · San Ramon, CA · Member since 2014 · 67 posts · 28 votes
5y
@Amit M. let us assume that in Mission rents is down by 20% . Will MF pricing be down also by 20% assuming this is not a rent controlled building ? I am still trying to get clarity on the income valuation of multifamily .
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
5y
@Sid Naik I highly doubt 20%. As @Johnson H. discussed, prices are sticky on the way down for a variety of reasons. There is some price softening in multi family in SF, but it also depends on the bldg’s overall desirability.
Just watch and track SF multi family sales to see what happens. IMO this winter will be soft, and may stabilize spring-summer 2021 IF major external events (vaccine, election results, economy) don’t go off the rails.
Flipper/Rehabber · San Francisco, CA · Member since 2017 · 176 posts · 70 votes
5y
Our studio ,that we rent, is down 20% in San Mateo (next to Hillsdale Mall/Train Station). A comparative studio we are looking to rent is down about 20% in Burlingame (Broadway) also.
Real Estate Investor · San Ramon, CA · Member since 2014 · 67 posts · 28 votes
5y
@Amit M.@Johnson H. I think the rent drop of 25% + in sfo will take 6 months to translate into lower valuations . Currently landlords might be in a freeze state and still grappling with reality . Otherwise I don't know how you can just valuations MF Price = NOI / cap rate and NOI is 25% down . Does this formula not hold good for multifamily valuation anymore ?I don't think rents will stabilize so fast ,the trend is just emerging of working from suburbs ,in my humble opinion it will reverse back but changes take a while to overturn and hence it could be a buying opportunity for MF while this trend of working from suburbs holds on ( it might take 2-3-4 years to turn back maybe ).
Property Manager / Investor · San Jose, CA · Member since 2013 · 779 posts · 301 votes
5y
I'm seeing rents continuing to drop in the bay area (west peninsula down through San Jose). Single family home selling prices are holding firm. There are still some multiple bids but not like the past 6-7 years. Multi-family properties values are slowly dropping. Some already down ~10% from the past couple of years.
@Amit M.@Johnson H. I think the rent drop of 25% + in sfo will take 6 months to translate into lower valuations . Currently landlords might be in a freeze state and still grappling with reality . Otherwise I don't know how you can just valuations MF Price = NOI / cap rate and NOI is 25% down . Does this formula not hold good for multifamily valuation anymore ?I don't think rents will stabilize so fast ,the trend is just emerging of working from suburbs ,in my humble opinion it will reverse back but changes take a while to overturn and hence it could be a buying opportunity for MF while this trend of working from suburbs holds on ( it might take 2-3-4 years to turn back maybe ).
Sid, you are definitely correct that the standard way to value commercial multifamily property is through the income approach/cap rate and that works well with buildings at market rate rents. However, when I look at properties for sale, I look at the potential of the property and the cap rate is one of the last things I look at. This is because I am looking for value add projects, those that need rehabilitation from mismanagement or the ability to add value in other ways. In SF, it is common to see super low cap rates of 0.5% to 2% selling, because there is great potential of the building. I would be happy to buy a 0% cap rate building if I can turn it into a 10% cap building in a reasonable time and the icing of the cake would be the value of the building at a 4% cap for a cash out refi.
In my opinion, a 25% reduction in rents will reduce NOI by even more than 25%. Why? Because there are a lot of expenses that can't be reduced as quickly as your decline in percentage of rents. I did some quick math and with a 25% decline in rents, holding expenses the same, it is a 38% reduction in NOI and value.
I have seen a few sales with pretty low purchase prices but it appears that sellers entertained low ball offers. There are price reductions but most started off high. We will see what happens when these CA propositions pass/fail, there are a few that don't bode well for landlords. Also, real estate is seasonal and inventory is low even for MFH, so we may see the usual a bit of softness this winter and spring will be telling of the rest of the year. Sid, you could be very right that prices fall 25%, but I am not seeing it yet.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
5y
^ yup....holding my breath for Prop 21 to fail and get flushed down the CA toilet! And given the latest polls, it’s likely to fail :) But to all you CA peeps out there, vote damnit, vote!
Investor · Austin, TX · Member since 2013 · 662 posts · 1k+ votes
5y
I hate to be the bearer of bad news but the basic rules of supply and demand still apply. I have no hunt in this San Fransisco market as I live in Texas. I was just curious as to what is happening in SF, especially since I just read this article on Yahoo.
The reason I am curious, is because I live in Austin, TX. We are getting more than our fair share of Californians fleeing. As an investor in Austin, I see our prices moving at a pace that may be sustainable in the short run but I don't believe to be long-term. So when I read that article above, I came here to substantiate what I thought would happen based on the article.
My son also works for what I would call a high-tech company here in Austin and he has been given the green light to work from home indefinitely. Covid has accelerated this trend of working from home and I believe it will have a profound affect on the demographics of inner cities going forward.
As of now, the rental market is very strong along with the overall housing market in Austin. Will it be sustained? I hope so but I am not sure. I will be watching your market closely, but for now it is still about supply and demand. Cheers.
Rents are significantly down for sure, especially in SF. People do not want to admit it. Nobody talks about it.
Prices still up.
How long do you think rents will continue to fall? At least we've gotten past the election uncertainties (prop 21, 15), Biden vs Trump, and multiple vaccines on the way, though the current COVID spike and increased restrictions aren't helping.
Real Estate Investor · San Ramon, CA · Member since 2014 · 67 posts · 28 votes
5y
@David Song how are prices up for multifamily which are valued based of income it produces ?
I have been talking to sfo brokers now and they are pricing the properties based of lower rents . of course rent control makes it difficult to get lower valuation on all units but there are properties which more than 50% of units vacant .
@David Song how are prices up for multifamily which are valued based of income it produces ?
I have been talking to sfo brokers now and they are pricing the properties based of lower rents . of course rent control makes it difficult to get lower valuation on all units but there are properties which more than 50% of units vacant .
@Sid - I am in the same boat as you. Just lost my tenant a few weeks ago and I have also had very few bites using the regular marketing channels. I am taking this opportunity to update the unit and then put it on the market in early 2021. The unit is old and dated.
Talking about your MF prices - Inherently as some folks were suggesting, land value in the bay area has been growing rapidly with the potential to convert your 5+ MF into a 7+ by adding ADUs (relaxed rules on those). Some LLs are also diversified and can use the losses on bay area rentals to offset gains in other areas. i.e. there is no incentive to drop the valuation on your MF. With the news of the vaccine available en masse, rents will come back to normal levels in a year or so (speculation of course). But you have the right strategy, there is always a good deal out there :)
I live in the Bay close to Rivermark too. I have noticed about the same. Rent prices down ~20%. Sale prices about intact. That means Price/Rent ratio has gone up, which I think makes selling attractive.
Have a 1 bed room in-law that was rented a year ago for $2,000/month up for renewal in December. The tenant asked for a rent reduction to $1,750, he wanted to stay in San Francisco but he was considering moving to out of SF since he could now work from home. I felt he was sincere, so since I would have lost at least a month rent if he moved out decided to renew at $1,750.
Real Estate Professional · Member since 2017 · 11 posts · 4 votes
5y
@Sid Naik You are right. The commercial MF properties are appraised solely on the rent revenue. I closed on a 10 unit apartment earlier this year in central valley. The rents have gone up 15-20% over there partly due to the Bay Area folks fleeing high rents. I would be more concerned about the return of the high rents in these high rent areas given the remote/flex working options provided by most tech companies.