Sacramento Multifamily Heating Up
Sacramento’s multifamily market has risen out of its post-recession slump. Tenants are moving into lower-priced office space and more people are leasing cheaper apartments in the state's capital.
Bisnow talked with Trion Properties co-owner managing partner Mitch Paskover and Cushman & Wakefield director Jason C. Parr to find out what’s making Sacramento an attractive market.
Mitch, above with his wife, tells us when Trion sold its two properties in Sacramento earlier this month, it had doubled the net operating income of one property to $1M from $500k and more than doubled the value of another. The two transactions totaled $25.5M, $10M more than the private equity firm's original $14.2M purchase price.
Sacramento’s economy has rebounded since 2009, with people making more money, creating more jobs and having the ability to pay rent and keep occupancies high, Mitch says.
Investors are a little nervous about the cap rates for selling in markets like Los Angeles and San Francisco where cap rates are averaging 3.5%, according to Mitch. Comparatively, Sacramento has cap rates averaging between 5% and 6%.
“A lot of people can’t afford to stay in the Bay Area and are finding a home in Sacramento. It’s still close to those markets in the Bay Area, but it’s more affordable,” he says. “Investors are buying in Sacramento as well and can make a little bit more return on their money.”
Cushman & Wakefield’s Jason says Sacramento is starting to attract institutional investment and is no longer just a regional market. It’s turning into a secondary or core market.
Healthy rent growth is helping improve the market. Jason says he just released 16 Powerhouse, above, which has the highest rents in Sacramento, with the newest rents at about $3/SF.
There’s been a limited amount of developments, with a majority of recent developments being small infill properties in the urban core, such as 16 Powerhouse. The project delivered in 2015 with high-end finishes and is 100% occupied with a long wait list, says Jason.
Jason, above at a conference in Southern California, tells us Sacramento has led the nation for seven consecutive months on effective rent growth. During the third quarter, the Sacramento region boasted the highest rent growth (11.9%), based on AXIOMetrics data. Comparatively, national rent growth is only 2.6%.
He says Millennials are migrating out of the Bay Area into Sacramento, preferring the urban environment without having to pay the high prices in the Bay Area. About 18,000 people are moving to Sacramento from the Bay Area each year and 42% of Sacramento’s population includes working Millennials, according to Jason.
The urban renaissance with the Golden 1 Center opening this month, and extensive public and private investment has “transformed downtown into a much more attractive, vibrant, urban district," Jason says.
“It’s a perfect storm of undersupply, urban renaissance and migration of Millennials,” he says.
Because a lot of Sacramento’s exiting multifamily supply was in need of significant renovations following the recession, investors, such as Trion, are able to sell properties for significant profits.
Mitch says Trion bought the 185-unit garden-style apartments Sierra Village, above, and 128-unit Regalia Crest in Sacramento about three years ago when the market wasn’t as hot as it is today. The properties were not in good condition and the occupancy rate was low. The complexes were in need of renovations and Trion added landscaping, installed hardwood flooring, and cleaned up mold and infestations.
Sierra Village at 5146 Jackson St sold to Oracle Property Development for $15.5M. Trion originally bought the property for $9.3M. It brought the property up to 98% occupancy and doubled its net operating income. CBRE SVP Marc Ross repped both the buyer and seller.
Trion sold Regalia Crest, above, for $10M, doubling the original purchase price of $4.9M. When Trion bought it, the complex was about 60% vacant; the property is now 94% occupied. ARA Newmark VP Nate Oleson repped Trion during the sale to a Bay Area company.
“Our strategy is always to buy in good metropolitan markets with good employment bases and good rent growth,” Mitch says. “We buy buildings needing renovations. We fix them up and create properties that are valuable.”
Mitch says Trion will remained focused on California and the West Coast, with a particular interest in San Diego, Los Angeles, Northern California and the East Bay as well as Portland, OR. He says his company is a “hands-on manager” and prefers to be a short flight away from its properties.
