North Bay apartment rents dipped for the first time in the fourth quarter of last year, ending a five year run up that saw rents increase nearly 30% from 2004-2008 as tenants were priced out of the housing market.

The sagging economy and competition from newly converted foreclosures in to rental stock have left North Bay landlords scrambling to keep their apartments filled with qualified tenants. Rent concessions are back, including lowered deposits, first month's free rent and even lowered rents in some of the larger complexes in Marin and Sonoma counties.

The softening rental market is producing the most pain for landlords in Sonoma county, where vacancy factors are increasing and it is taking longer to rent out vacant apartments. A fourth quarter rental survey by Novato research firm Real Facts, Inc. found that the average occupancy factor for several north Bay counties dipped almost 1% to 94.8% from the previous quarter.

In Marin county, the occupancy rate is still a very healthy 96.5%, although professional property managers are reporting that they have been forced to lower rents from 5-7% to get the apartments filled. Qualified tenants are still making rental applications in Marin county, but the time frame to fill units is increasing. In the boom years, multiple applications were routinely received by landlords. Now, landlords and property managers may experience loss of rent over a 30 day period while they aggressively search for tenant applicants.

The falling North Bay rental rates and tight lending requirements negatively impacted the volume of apartment sales in 2008. Sales volume dropped almost 50% in the past year from previous years volume. The large volume of sales and demand for apartment investments from 2003-2005 pushed apartment prices up artificially with gross rent multipliers some 2-3 percentage points higher than in a  normal market. Investors have pulled back from the market and are waiting for prices to drop to more affordable levels. Even though there were few distressed sales in 2008 motivated sellers who wanted to move on were willing to price their properties so that they would attract buyers. Those properties , with 5-6.5% cap rates, in Marin and Sonoma counties sold quickly. But the continuing glut of unsold inventory in Sonoma County reflects the over pricing that still exists in the apartment market.

In Marin County, there is a shortage of apartment inventory, particularly in the property category above five units. This is reflected in the stable rental market with relatively low vacancy factor. As the occupancy factor drops, due to job losses and a softening economy, more sellers will put their properties on the market and prices will move lower as apartment buyers demand better returns.

Gross rent multipliers in Sonoma County are now moving from highs of 12 times rents to below 10 times rents for motivated sellers. In one recent transaction, the seller paid nearly $2,300,000 for an apartment property in Northwest Santa Rosa at the peak of the market and is now willing to sell for under $2,000,000.

Like wise, in Marin County gross rent multipliers are moving from their peaks of 2005 that ranged as high as 18 times rents in Southern Marin cities to 15 times rents in central Marin cities. In 2008, similar properties sold for 15 times rents in Southern Marin and 11-12 times rents in central Marin communities of San Rafael and San Anselmo.

Industry experts are expecting apartment prices to continue to fall during 2009-2010 in the North Bay as investors demand better returns and lenders underwriting continues to tighten up in response to the credit crisis.

This year apartment investors should be able to find the better returns and creative deals that make a worthwhile investment. Local apartment lenders are continuing to offer historically low rates in the 6% range and sellers are becoming more realistic about current apartment property valuations.

Katherine J. Higgins
Investment Broker
Mobile: (415) 302-7730