Multifamily Basking in Low Cap Rates
Low cap rates are heating up the multifamily sector in San Francisco, and both sides of the table (lender and owner) gathered at the Intercontinental San Francisco on Oct. 31 to pinpoint market trends.
Cap rates are arguably lower than 2007 levels, and the price per unit is high, according to Pacific Urban Residential CEO and prez Alfred Pace. While 17% of the market isà luxury renters, all of the new supply meets that luxury demand. Many of those potential renters with high-paying tech jobs are coming from abroad, so that nature of the demand cohort concerns Alfred. It doesn't take a lot of movement in occupancy to destroy landlord pricing power. No REIT operator wants to start a quarterly analyst call with, "Our portfolio is 93% occupied." (We usually like to start our calls with "Hello, how are you? You look great.") As soon as that happens in downtown San Francisco, rents will come down.
Walker & Dunlop VP Mark Plenge has seen just about every capital source flood back into the market this year and become more aggressive. Acquisition volume is still lighter than everyone would like it to be. "But we are seeing acquisitions get financed by anybody and everybody... there's a lot of money to bring to the table." Despite the spike, sounds like lessons were learned from the last crash. (We study history in order to avoid repeating it and to read funny names.) He's not seeing over-leveraging or crazy lending like 2005 to 2007. He also doesn't see a catalyst that would drop rents precipitously.
San Francisco has a little "something for everyone" when it comes to renting options, says Veritas Investments founder Yat-Pang Au. He sees residents with $150k/year salaries save money by living in the Tenderloin, while others opt to live in Pac Heights or the Marina. "It's a lifestyle choice." He's found a way to appease renters who want a car but can't find spots in the city: Veritas is the largest hoster of Zip Cars in San Francisco. (You'll get to drive without the hassle of having to get the oil changed.) "It's turned out to be a big, runaway hit." In addition, solar energy on many of its buildings resonate with tenants who don't want to pay for electricity.
Spiraling cap rates are causing investors to zero in on gateway city markets like San Francisco, according to Opus Bank income property banking prez Dan Borland. San Francisco is No. 2 behind Houston in terms of healthiest market for apartments. (A renter a day keeps the cap rates away.) This year his team expects to do $1B in apartments fundings. As the cost of home ownership and renting come closer together in San Francisco, he asked whether that means there's going to be softness in occupancy. Pang doesn't think so; the city's makeup of 70% renters isn't expected to change much.
Despite the market being "white hot" for residential buyers in San Francisco, the problem is there's an incredibly limited amount of for-sale supply, says Urban Green Investments CIO Peter Hagist. Peter sees lots of demand for his four and five-bedroom units, with Millennials willing to pay $1,000 to $1,200/month per room to live in close quarters. "It's their slow transition from college into adult life." Younger renters also want neighborhood charm and the ability to walk out the door and go to bars or restaurants. Marcus & Millichap's Zoran Labudovski not only got housing intel, but a hockey game out of the event: He won a pair of club-level San Jose Sharks tickets (AEI Consultants drew his biz card).
