Apartment Report

Apartment Report Another Stellar Year for Multi-Family Sales 2003 experienced a continuation of the momentum that saw the shattering of all multi-family sales records in Bakersfield California during 2002. For the second straight year, the total volume sold record was broken. The seller’s market in 2003 witnessed prices climbing to the highest levels ever achieved in Kern County. Vacancy rates remained low and rents continued to remain stable with slight escalations throughout the city. New construction appeared in the market, and for the fourth year in a row the REO market was non-existent. Sales In 2003, 2657 units were sold, which was a decrease from 2002 when 3,315 units changed ownership. Despite this decrease in units sold, the sales volume increased to $133,617,458 which was higher than the previous years volume of $125,610,912. The average sales price per unit soared from $37,891 in 2002 to $50,288 in 2003. (32.7% increase). One significant benchmark was achieved in 2003; for the first time in Bakersfield, the $100,000 per unit barrier was broke. Thirteen luxury fourplexes obtained prices at this level. 2003 is the first year in recent history that investors could actually purchase a property in the first quarter and resell it by the fourth quarter for a profit. The average Gross Rent Multiplier (GRM) in 2003 was 9.15, which wiped out the previous record high of 6.77 set in 2002. GRMs ranged from a low of 3.33 to a high of 14.17, with the majority clustered in the 8.5-10.5 range. Overall capitalization rates (cap rates) ranged from 6.3% to 8.4% during 2002. The majority of the larger apartment communities were selling in the 7% range. CITYWIDE Total Dollar Volume Sold $160 $140 $120 The 2003 Year in Review Produced by Marc A. Thurston Highlights • Record Sales Volume Low Vacancy Rates Bakersfield Market Continues to Boom • • Inside P1 2003 in Review P3 2004 Forecast P4 Graphical Representation by Area Millions $100 $80 $60 $40 $20 $0 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 Year P6 Marc A. Thurston Your Apartment Expert (continued on Page 2) Independently owned and operated Page 2 Apartment Report Factors such as location, condition, and past financial performance all had a direct impact on the rates obtained. For the third year in a row, the majority of the buyers were from outside the area. Unlike the previous two years where the investors were primarily San Diego or San Francisco based, investors from throughout California descended upon Bakersfield. Despite the improving stock market, the low unit prices and even lower interest rates continued to drive our market. Additionally the positive economic outlook for the valley made the market attractive. Investors quickly absorbed any new listings that came on the market in 2003. For the second year in a row sellers would receive multiple offers within 24 hours from the point that their property hit the market. Likewise exchange buyers, looking to replace properties that they had already sold, quickly snapped up the larger multifamily properties. CITYWIDE Average Price Per Unit $60 Rents in the lower to middle level apartments maintained consistency throughout the year with some slight movement upward. CITYWIDE Historical Vacancy Rate 8% 7% 6% Percentage 5% 4% 3% 2% 1% 0% 10/98 04/99 10/99 04/00 10/00 04/01 10/01 04/02 10/02 04/03 10/03 Date Occupancy – Vacancy Citywide occupancy in 2003 was a constant 95.9% according to Kern Appraisal’s Bakersfield Apartment Market Survey. The lack of new multifamily housing, and population growth offset the number of tenants who took advantage of low interest rates and purchased homes. For the past five years, the Northwest sub market has traditionally been the lowest vacancy rate. In 2003 the rate was 11.8% due to the new construction that is starting to absorb some of the demand in the Northwest. The South submarket was the strongest rental area at 1.5% vacancy. Financing $50 Price per Unit Thousands $40 $30 $20 $10 $0 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 Year Rents Rents were not as aggressive in 2003 compared with 2002. This was due to a large number of “short term – transitional housing” renters who occupied the upper end of the multi-housing market. By the end of 2003 the time frame for building a new home in Bakersfield was 8 – 12 months. Typically home builders will not sell to a buyer who has a “sale contingency” on their existing home. The home buyer is forced to sell first and then move into temporary housing while they await their new home. Traditionally, most homeowners try to move during the summer months. This cycle created a spike in the apartment vacancy rates in the first and early second quarter of the year. The third and fourth quarter returned to the normal levels. Money continued to chase deals in 2003. The Federal Reserve Board maintained the funds/discount rate. Multifamily rates remained the 6% to low 7% range for most of the year. The larger properties saw a wide array of loan programs that offered rates as low as 4.25%. Most commercial loans (5 plexes +) still required 30% down. Active lenders in our market during 2003 were Washington Mutual, Stockmen’s Bank, Bank of the Sierra, Stockdale Saving and Loan, and ARCS Mortgage. Real Estate Owned Market (REO) (Foreclosures) The REO market in 2003 was non-existent in Bakersfield. This is reflective of the strong market now existing in Bakersfield. Page 3 New Construction New construction appeared on the horizon in 2003. The population growth, economic forecast and rental rates (in the Northwest and far Southwest) are at a level that has justified building new units. Approximately 160 new units were brought on-line in 2003. Currently 644 units are under construction/rehab with an additional 2,124 units in the concept/escrow phase. At the time of this report all existing “approved” sites were in escrow or owned outright by the ultimate developer. Although new land is constantly being brought on-line by land developers, the local government has been reluctant to provide new apartment sites due to the prevailing community attitude towards apartment growth. Two significant laws/fees were enacted last year that could have a serious impact on the proposed new construction. The traffic impact fee was doubled from approximately $1400/unit to $2800/unit. Secondly the rules governing future fourplex communities were changed to encourage lower density along with greater amenities. Both of these changes will hit the bottom line when penciling out economics of a new project. Forecast In my opinion, the national economy is definitely in the midst of a recovery. With 2004 being an election year, rates will likely remain at their current levels with minimum movement throughout the year. The stock market should continue its recovery throughout the year. In 2004, I anticipate that buyers will continue to outnumber sellers as they have the last couple of years. Once again the listing inventory will start increasing by the middle of the 1st quarter as landlords realize the prices they may obtain. Out of area investors will continue to make up the largest portion of buyers, as they view local prices as attractive alternatives to those in their vicinity. While our values will continue to appreciate this year, by the middle of the fourth quarter I feel our market will start to shift as the impact of new construction starts to be felt in our market. By early 2005, the current escalating market could start to stabilize. The first two quarters will experience a slightly higher vacancy rate than the last two quarters due to the new home construction cycle. Depending upon the absorption rate for the new units under construction, the third and fourth quarters have the potential for experiencing a spike in vacancy for upper end properties. Lower to mid level properties should experience a solid year. New construction is at a crossroads this year. If the current properties under construction are well received by the public and leased up in a timely manner, then it is likely the 2,124 units in the pipeline will start to move forward with greater speed. Should the new apartment communities not achieve their expected returns or occupancy, many of these developers are likely to put their projects on hold until the market dynamics are more favorable. Overall I predict that 2004 will be another solid year for the multifamily market in Bakersfield. CALL TODAY FOR FURTHER INFORMATION ON INVESTMENT OPPORTUNITIES IN CENTRAL CALIFORNIA 661.862.5454 Extension 213 KNOWLEDGE INTEGRITY EXPERIENCE Page 4 Apartment Report Graphical Representation by Area Central Bakersfield For the second straight year the Central area had the second largest number of units sold. 713 units changed ownership during 2003. Pricing for 1-bedroom and 2-bedroom units shot up during 2003, while the prices on the 3-bedroom units fell. The average Gross Rent Multiplier is up from 6.29 to 9.07. $60 CENTRAL Average Price Per Unit $50 Price Per Unit Thousands $40 $30 $20 $10 $0 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1 bedroom 2 bedroom 3 bedroom North Bakersfield The sales volume in 2003 was off by 50% from the volume in 2002. Pricing in all three bedroom ranges was up significantly over the prior year. The average gross rent multiplier was up to 8.12. $60 NORTH Average Price Per Unit $50 Price Per Unit Thousands $40 $30 $20 $10 $0 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1 bedroom 2 bedroom 3 bedroom Northwest Bakersfield As new units come on line and sell, the volume is starting to pick up in the Northwest. Due to new units, the 2 bedroom unit pricing hit $97,450. The average gross rent multiplier was 9.26. $60 NORTHWEST Average Price Per Unit $50 Price Per Unit $40 Thousands $30 $20 $10 $2003 2002 2001 2000 1 bedroom 1999 1998 1997 1996 1995 1994 1993 2 bedroom 3 bedroom Page 5 Northeast Bakersfield Once again the Northeast area had the third highest sales volume for units during 2003. With 625 units sold during the year, this was consistent with the 2002 number of 688 units. The average price per unit in all three categories -- 1-bedroom, 2-bedroom and 3-bedroom -- experienced price increases over the previous year. $100 NORTHEAST Average Price Per Unit $80 Price Per Unit Thousands $60 $40 $20 $0 2003 2002 2001 2000 1999 2 bedroom 1998 1997 1996 1995 1994 1993 1 bedroom 3 bedroom Southwest Bakersfield $90 SOUTHWEST Average Price Per Unit The Southwest submarket was the sales volume leader with 1,184 units changing ownership. One-bedroom pricing was down $1000/unit. Two-bedrooms were up $16,000 and three bedrooms were up $30,000. The average gross rent multiplier increased from 7.57 in 2002 to 10.01. $80 $70 Price Per Unit Thousands $60 $50 $40 $30 $20 $10 $0 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1 bedroom 2 bedroom 3 bedroom Southeast Bakersfield Despite the spike in sales during 2002, the southeast had only 25 units change ownership during 2003. One-bedroom pricing fell from the previous year, while 2 bedrooms and three bedrooms hit higher marks. The average gross rent multiplier rose only slightly to 5.88. $60 SOUTHEAST Average Price Per Unit $50 Price Per Unit Thousands $40 $30 $20 $10 $0 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1 bedroom 2 bedroom 3 bedroom THE APARTMENT REPORT Grubb & Ellis|ASU & Associates 2000 Oak Street, Suite 100 Bakersfield, CA 93301 PRSRT-STD U.S. Postage PAID Bakersfield, CA Permit No. 261 Knowledge, Integrity and Experience in Central California’s Commercial Real Estate Market M arc A. Thurston is the most informed, experienced and hard-working apartment expert in Bakersfield and the surrounding areas. In the past year, Marc transacted $28.5 million in sales, comprised of 457 units in total. For over 13 years now Marc has helped property buyers and sellers realize their real estate investment goals. For help with your goals, call Marc today at (661) 862-5454 extension 213.