Multifamily Properties ‘Very Attractive’ for Investors
Local market forecast top topic at meeting of Institute of Real Estate Management
At last month’s annual economic forecast meeting of the local chapter of the Institute of Real Estate Management (IREM), members received encouraging news about the state of commercial real estate on the Central Coast, particularly in the multifamily (apartments) sector. Steve Golis, Brian Johnson and Jon Standring of Radius Commercial Real Estate & Investments delivered an overview of apartments and commercial sales activity through 2011 and discussed projections for the local market during the remainder of 2012.
Among the highlights of the Feb. 28 morning discussion, Golis, a Radius partner, pointed out that many investors looking for return in the current down economy are turning to apartment properties. “The bottom line is right now it’s easier to obtain financing for apartment properties versus other commercial real estate,” he said.
Historically low interest rates and heavy competition among financiers are working in investors’ favor, he said, making this a good opportunity for those looking for starter investments, for example, to finally dip their toe in.
In addition, Johnson, Radius’ general manager, offered cautious optimism about the commercial real estate market in general. “No doubt there have been numerous challenges in commercial real estate over the past few years,” he said. “But all signs are pointing to a slow recovery under way across all sectors.” Johnson also pointed to an interesting trend on the commercial side that has continued from 2011 in which business tenants, when possible, are finding it beneficial to purchase rather than lease. “Many business owners are not aware that they have options if they’re willing to put in the time and resources,” he noted.
The 2012 South Coast Multifamily and Commercial Market Forecast was attended by local property management companies, leasing brokers and agents, apartment managers, appraisers, contractors, and commercial and multifamily vendors. Proceeds from the annual event hosted by IREM Local Chapter 102 are donated to the IREM Foundation. The nonprofit IREM is an international community of real estate managers across all property types dedicated to ethical business practices and maximizing the value of investment real estate. It is the only professional real estate management association serving both the multifamily and commercial real estate sectors.
“The Radius team gave a clear picture of how the markets are going and should continue to go in the coming year,” said IREM board member and past president Janet Eastman CPM of Gardner Management Ltd. “We rely on the expertise and collaborative spirit of our membership to improve and benefit our industry as a whole.” The following excerpt regarding South Coast apartment property sales activity is from the Radius Commercial Real Estate & Investments 2011 year-end report:
South Coast Apartment Sales
Multihousing will continue to be a favored sector for commercial real estate investing in 2012, outperforming all others. which should continue to feel the burden of a slower economy. Demand in Santa Barbara County continued to show positive signs since the second quarter of 2011, as South Coast sales increased with five additional sales bringing the total for the year to 15.
Apartment financing remains the most readily available loan to get as several local banks are competing for these loans, many of which are below 4 percent annual interest. Financing stability from Freddie Mac and Fannie Mae will provide another advantage as access to agency debt sets this sector apart from others that have encountered more difficulty obtaining financing. 2011 Apartment Sale Highlights Heritage Oaks Villas, Vandenberg Village
- 101-unit bank-owned property is used for senior housing.
- Property closed for $11.5 million with 5.8 percent cap rate.
- 48 units, all two- and three-bedroom townhouse units.
- Property closed for $4.65 million at 7 percent cap rate.
203 Ladera St. (across from SBCC)
La Vista Apartments
- 460 units Santa Maria
- 460 units on four parcels, this is the largest apartment complex in Santa Barbara County.
- The property closed in November 2011 for $43 million with a cap rate close to 7 percent.
- Seller was from Seattle and the buyer is headquartered in Los Angeles, though both own numerous properties along the Central Coast.
Inventory remains relatively minimal with few available properties on the open market, although buyers appear eager for larger, well-located properties priced within comparable (properties that have sold) ranges (more than 25 units).
The South Coast appeal remains as a blue-chip investment. Prices appear to have stabilized and we forecast appreciation for this year as the demand for rentals seems to continue to be raising rents. As of this writing, some interest rates for apartment properties are in the high 3 percents to low 4 percents.
Very limited inventory of available rental units on the South Coast meant slightly positive growth for rents in 2011. With little if any new units coming on the market for lease, too many people are chasing after too few available rentals, thus keeping rents stable and making the Central Coast an attractive investment.
Rents above the average have made landlords rethink their positions and we have seen some of those rents soften. We believe these rents have stabilized.
Our forecast for 2012 is for rental-rate appreciation to continue to ease on the South Coast yet still remain positive.
- Prices per unit for 10+ units will average $180,000-$220,000 per unit. Smaller buildings (5-9 units) will sell at about the same range.
- Cap rates have lowered for the South Coast and will need to be above 5 percent for properties to sell. We expect the majority of sales to be between 5.1 percent and 5.7 percent on properties over five units.
- Gross rent multipliers will stay at or near 10.5–12.75X for 10+ units while 5-9 unit buildings will sell at 11-14X gross.
- Rents in Santa Barbara will increase modestly by 1 percent to 3 percent.
- Vacancy rates will remain stable at well under 5 percent and we predict they may further decrease as we muddle through the housing short sales trend where folks are rethinking whether to rent or own and the pendulum seems to be moving toward renting.
- Bright Spots: Sales activity and interest in purchasing well-located properties continue to remain very strong. We will continue to see demand for well-located properties in downtown Santa Barbara, although not many choices are on the open market at this time.
Click here for the full report. Radius Commercial Real Estate & Investments is a full-service commercial real estate brokerage serving all of the Central Coast. Locally founded and operated, Radius further distinguishes itself as a regional business leader by providing sustained industry data reporting and market forecasting.
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