Apartment owners and operators are still reeling from the sharp decline in market rents last year and expect flat to declining rents through most of 2002.
Last year's dot-com layoffs, stock market decline, and shock from the September 11 terrorist attacks left most of the North Bay apartment market in a steep decline, with rents in south Marin County dropping nearly 20% in the first quarter of 2001. Tiburon and Mill Valley experienced the same sharp decreases in market rents, and apartment owners were unable to give any rental increases to existing tenants.
At the same time, the vacancy factor in Marin moved from a low of 1.5% in the third quarter of 2000 to a new high of 4.5% in December 2001. Operators of 100+ unit complexes throughout Marin are reporting up to 10% of units vacant and the need to offer incentives to prospective tenants to fill units.
According to one apartment building owner, many vacant apartments are sitting empty for up to 30 days, and move-in bonuses of one month's free rent or a reduced security deposit are needed to attract new tenants.
In San Rafael, where the majority of apartment complexes are located, rents have dropped an average of 8.5%-10%. The exception is the Canal area, where rents are still increasing as demand continues. Many apartment owners in popular rental neighborhoods such as Gerstle Park and West End are reporting that new tenant applicants are negotiating advertised rents down and asking for special deals from owners to move into the apartments.
“A year ago I had a waiting list,” said one owner of a 30-unit building. “Now, I'm advertising for up to two weeks before I even get enough calls to select a tenant." This owner says she has been through a soft market like this before, in the early 1990s. At that time, she decided to upgrade her vacant apartments to make them more attractive to prospective tenants.
Once again, she is upgrading apartments to attract qualified new tenants. One of the largest complexes in San Rafael, the Highlands of Marin, has been struggling throughout 2001 with increased vacancies and declining rents. For example, in the first quarter of 2001, management reported one bedroom, one bath rents at $1,610-$1,800 per month. This year, the rates have dropped to $1,300-$1,595 for the same apartments.
According to Realfacts in Novato, the median apartment rent for all of Marin County dropped from $1,700 to $1,600 over the past year, a 6% decline.
Sonoma County rents
In Sonoma County, a similar story is unfolding, with sharp declines in the larger, more expensive complexes and smaller declines reported by the small property owners in Santa Rosa, Sonoma, Petaluma, and Healdsburg.
For example, the Village Square, a 128-unit complex in northwest Santa Rosa, reported one bedrooms renting for $925-$950 per month in 2001. This year, the same units are being offered for $850 per month, some 8.1%-10.5% less than a year ago.
At the 156-unit Redwood Park complex on Piner Road, managers are reporting no increases in rents in 2002, with advertised one-bedroom rents dropping from $1,150 per month in 2001 to $975 per month this year.
On average, Realfacts reports Sonoma County rents declined approximately 3% from the first quarter to the last quarter last year. Industry experts expect further declines this year, as nearly 800 new rental units become available in 2002.
“All of these new units will definitely impact the softening rental market in Sonoma County,” says Realfacts CEO Caroline Latham.
The investment market
The sliding rental market has also affected apartment sales activity in the North Bay.
“Activity has slowed dramatically in Northern California,” reports Ms. Latham. A look back at reported sales for 2001 shows only a handful of complexes turning over in the North Bay, as consumer confidence declined over the year, and a lack of inventory brought dealmaking to a virtual standstill.
However, many apartment brokers are reporting increased sales activity in early 2002 as investors regain confidence in the market and resume their buying and selling activities. Last year, Marin County sales averaged up to $170,000 per unit, while Sonoma County sales were reported at up to $130,00 per unit.
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Katherine Higgins is an investment broker at RE/Max of Southern Marin in Mill Valley specializing in apartment sales in Marin and Sonoma counties; 415-381-7385 or katherine@khiggins.com. |