Moving On Up

Andrew S. Ross, SF Gate.com

Nice to know in these uncertain times that there are cases of relative stability. Take apartment living, for example. According to a report out today, it's the place to be, for both landlords and tenants.

"Landlords who have been waiting to exhale can breathe a sigh of relief as renters slowly creep back into the market to fill up their empty units," says Novato's RealFacts, a database company that analyzes apartment rental numbers nationwide.

Bay Area landlords might not be entirely thrilled, having seen their rents drop by an average of 7.5 percent over the past year, compared with 3.7 percent nationwide, according to the report, based on figures up to Sept. 30. Still, not so bad in light of the 17.3 percent increase they enjoyed over the past four years. In San Francisco, rents dipped 5.6 percent over the past year - studios and one-bedrooms showing significant drops - compared with an overall 26.4 percent increase in the past four years.

San Francisco tenants might not be over the moon either. Averaging $2,270 a month, their rents are among the highest in the nation, and considerably more than the rest of the Bay Area, including Marin. But before you give your landlord 30 days' notice, be warned that Marin's 95.9 percent occupancy rate is even higher than San Francisco's, according to the report ( www.realfacts.com).

Anything over 95 percent occupancy, which San Mateo also enjoys, is considered "healthy," said RealFacts co-founder Sarah Bridge. Not so healthy are Santa Clara, Alameda and Contra Costa counties, with higher vacancy rates. Santa Clara County's whopping 10.1 percent decline in average rents was among the worst in the country. A glut of overpriced apartments resulting from the tech downturn is the explanation.

All in all, "apartments are looking pretty good," said Bridge. "Landlords are adjusting their rent levels to what is affordable."

Or Not?

Denise Kalette, National Real Estate Investor

Commercial real estate prices have taken a dive of 32.8% from a year ago, and 40% from two years ago, a new report by Moody’s/REAL Commercial Property Price Indices shows. Most surprising is the steep plunge in prices for apartments, once considered the golden sector and the property type least damaged by recession and the nation’s credit crisis.

The special report from Moody’s Investors Service issued this week shows particular weakness in the Florida apartment market and in the San Francisco office market. Declines occurred across four major property types: multifamily, industrial, office and retail. Hotels were not included.

“Given how bad things are, there’s really no reason to sell unless you’ve got a gun to your head,” says Joe Franzetti, managing director at Cohen Financial, a Chicago-based mortgage banking firm.

“A seller has to be highly motivated today for a couple of reasons. They either have to get out of an obligation, or they’ve had a fund and it’s run its course and it’s time to sell the asset because it’s a turnaround situation.”

After a 40% drop in prices, many borrowers have no equity left in their properties, says Franzetti. Their stark choices are to sell at today’s depressed values or wait it out and sell when the market recovers. In many cases, the property has already passed from the borrower’s hands to the lender, who must make a choice on whether to take a haircut on the asset.

The most recent transaction figures show a 32.1% price decline for apartments from two years earlier, and that figure is expected to climb closer toward the 40.3% aggregate for all four property types in next month’s report, according to Moody’s analyst Connie Petruzziello.

“Multifamily has been hit hardest, and we’re seeing it also in our delinquency rate.” Moody’s also compiles a CMBS loan delinquency report that tracks the multifamily, office, industrial, and industrial sectors. In September, the multifamily delinquency rate for commercial mortgage-backed securities (CMBS) loans at least 60 days past due reached 6.09%, compared with just 1.47% just a year earlier.

“We’ve really seen multifamily skyrocket [in delinquencies]. That’s pretty much what we look for to see which property type is doing the worst,” says Petruzziello. Right behind multifamily is the hotel sector, with a delinquency rate of about 5%, the analyst says.

One reason some apartment markets, such as Miami, Phoenix and Las Vegas are faring worse today is the amount of speculation that occurred in transactions taking place two years ago at the height of the market. The timing of the deteriorating market was different for each sector.

“All real estate is struggling with valuation drops, but on a relative basis multifamily is healthier than most thanks to the constant and strong presence of Fannie Mae and Freddie Mac,” says Doug Bibby, president of the Washington, D.C.-based National Multi Housing Council, which represents apartment communities.

Multifamily occupancies and rents rely on job growth, so it’s hard to predict a recovery or price stabilization for 2010, says Bibby. “Drops in valuations are always problematic, especially of this magnitude because they essentially wipe out the equity in the deal.”

NMHC sees signs of heavy bidding for core assets in strong markets, offering hope that the bid-ask spread between borrowers and sellers will contract, he says. That could bring more capital to apartment transactions.

While the commercial real estate industry is still bleeding financially, the bleeding is not as severe as it was a month ago. One positive note is that transaction prices across all property types declined 3% month-over-month in August 2009 compared with 5.1% July, and the improvement was even more striking than transaction prices reported in May.

Although it’s a difficult pill for many owners to swallow, today’s transaction prices may indeed reflect the real value of their properties, particularly if they must sell in the current market.

“It’s very hard to say whether a property has an intrinsic value that’s greater than where the market is today. The fact of the matter is, if you have to sell, this is where the market is today. And right now, it’s severely depressed,” says Franzetti of Cohen Financial. If the owner can hang on to the asset, its price could rise, however.