Multifamily Report. Sacramento Apartment Insights Volume 4 4th Quarter Accelerating success.

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1 Multifamily Report Sacramento Apartment Insights Volume 4 4th Quarter 2013 Accelerating success.

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3 4Q 2013 MULTIFAMILY greater sacramento research & forecast Report Fourth Quarter 2013 General Market During 4th Quarter 2013 the Sacramento apartment sector continued to hold firm in its solid fundamentals, with average rents slightly increasing and average occupancy holding firm. Average monthly rent during 4th Quarter 2013 increased from $973 to $978, and average occupancy in the market ticked down ever so slightly by 10 basis points to end the quarter at 95.9%; keeping in mind that year-over-year average occupancy increased by 130 basis points. News on the local economic front is finally more positive, with Sacramento s employment base recording positive year-over-year growth for October, November and December, and at an escalating rate. The table to the right summarizes the performance of several of the leading apartment market indicators measuring the health of Sacramento s multifamily market. Some of the key takeaways from Sacramento s 4th Quarter 2013 market performance include: Overall MARKET INVENTORY remained above full economic occupancy, ending the quarter at 95.9%, and is a sizeable 130 basis point increase from the Q recorded level of 94.6%. The average apartment MARKET RENT in Sacramento ended December 31, 2013 at $978, just slightly above the September 30, 2013 average rent level of $973, and also above the average rent level of $964 reported one year earlier. The change in same-store rents was reported at 0.5% for 4th Quarter 2013, and 2.8% year-over-year. (i.e., 4th Quarter 2013 average market rent was 2.8% greater than 4th Quarter 2012 average market rent for the identical group of units surveyed). Multifamily permit issuance declined once again during 4th quarter, with only 61 issued during the three-month period, bringing the total issuance in Sacramento to 696 for all of 2013, only slightly up from the 479 issued during Key apartment metrics - 4Q 2013 Total Apartment Inventory 141,661 Quarterly Apartment Absorption (99) Trailing 12 Month Absorption 2,177 Quarterly Unit Completions 60 Trailing 12 Month Completions 390 Annual Increase in New Inventory 0.28% Market Occupancy 95.9% Change from Previous Quarter -0.1% Change from Previous Year 1.3% Average Market Rent $978 Same-Store Decline from Previous Qtr 0.5% Same-Store Increase from Previous Year 2.8% Trailing 12-Month Sacramento Apt Cap Rate 6.6% Change from Previous Year -1.5% Trailing 12-Month US Apt Cap Rate 6.2% Change from Previous Year 0.2% *Please note that: Change values refer to basis point change Same-Store refers to a comparison that is made querying the same exact group of properties between two points in time. market indicators There were only 60 apartment unit deliveries to Sacramento s apartment inventory base during 4th Quarter 2013, bringing the total completions to 390 over the past four quarters, a significant decline from the 697 completions recorded during VACANCY 4th Qtr 2013 Projected 1st Qtr 2014* As of December 31, 2013 there were eight multifamily properties under construction in the Sacramento area totaling 886 units, with all of those units expected to be delivered sometime during The continuing low home ownership rate in the region, and limited new multifamily construction, should help to offset some of the pressures from the improving home market. NET ABSORPTION deliveries construction Lease Rates *1st Qtr 2014 over 4th Qtr 2013 Change

4 MULTIFAMILY 4TH quarter 2013 Key Submarket Highlights During 4th Quarter 2013 the various submarkets comprising the Sacramento apartment sector performed well. While some submarkets are stronger than others, all submarkets continue to record strong occupancy and rent levels. Sacramento Submarket Summary Trailing 12 Months Submarket Avg Unit Size sf Avg Market Rent (1) Avg Rent/ SF Avg Occupancy Unit Deliveries Unit Absorption Central Sacramento 800 $1,337 $ % South Sacramento 878 $937 $ % Natomas 896 $987 $ % N Sacramento / N Highlands 873 $886 $ % Arden/Arcade 793 $792 $ % Carmichael 812 $766 $ % Rancho C / East Sacramento 838 $843 $ % 0 (61) Citrus Heights 805 $857 $ % Orangevale/Fair Oaks/Folsom 907 $1,136 $ % 0 84 Roseville/Rocklin 927 $1,103 $ % Davis/Yolo County 864 $1,159 $ % SACRAMENTO AREA 390 2,177 Some of the key takeaways from Sacramento s 4th Quarter 2013 submarket performance include: Occupancy in the various submarkets remained relatively stable between 94.2% and 98.0%, with only minor fluctuations in vacancy, up and down, across the 11 submarkets. Unit deliveries continue to remain low, with only two submarkets recording unit completions above 100 during the last 12 months. Annual same-store rent growth was highest, for the first time, in the South Sacramento submarket at 4.6%, followed by the Central Sacramento submarket at 4.4%. It is worth noting that in 10 of the 11 submarkets, rent recorded in 4th Quarter 2013 was higher than the rent level reported for 4th Quarter 2012, with only the Rancho Cordova/East Sacramento submarket yielding a decline over the 12-month period. Concessions during 4th Quarter 2013 were highest in the North Sacramento/North Highlands submarket, averaging over 7.2% of the contract rate. During 4th Quarter 2013 the average concession metro wide declined from 6.2% to 4.9% of the contract rate. Colliers International p. 4

5 MULTIFAMILY 4th quarter 2013 Sacramento Apartment market During 4th Quarter 2013 Sacramento s apartment market fundamentals continued to be solid, with inventory remaining above full economic occupancy at 95.9%. Though the region s single family market definitely improved during 2013, the recovery effects experienced during Q4 illustrated more of a slowing of that improvement, allowing for local multifamily fundamentals to remain strong. Closing statistics published by the Sacramento Association of Realtors ( SAR ) indicated that during Q a total of 3,831 escrows were consummated, a significant decline (19.3%) from the 4,747 closings reported by SAR for Q Additionally, though the mean average price recorded for Sacramento County home sales increased $56,411 during 2013, escalating from $225,450 to $281,861 during the 12-month period, it is important to note that the price increased by $47,996 (21.3%) during the first half of the year and by only $8,415 (3.1%) during the second half of the year. These statistics are consistent with a market that is cooling down a bit, and though the region s new home starts are up and the number of closings in the region still robust, show a slight stalling of the single family fundamentals. Furthermore, homeownership rates in Metro Sac over the past four quarters are consistent with the trends experienced in the single family market during the past 12 months. The local homeownership rate during 1st quarter increased almost 20 basis points, and then increased another 330 basis points during 2nd Quarter 2013, and declined back to under 59% during 4th Quarter Employment in the region is once again on an upward trend. As the graph to the right illustrates, the year-over-year employment level recorded in the four-county Sacramento region has registered positive for the past four months. Though this is good news, Sacramento will still need to post much stronger employment numbers to maintain the improvement levels in the multifamily sector. Multifamily permit issuance in the Sacramento area remains low with only 696 issued during 2013 in the 4-County region, though this is a slight increase from the 479 total permits reported issued in the region during By comparison, however, there was an average of 3,450 multifamily permits (5 units or greater) issued annually in the same 4-county region from The current development pipeline remains minimal, and is unlikely to ramp back up significantly until the region produces a much larger renter pool via new employment, and property values climb back above replacement costs. Year-Over-Year Change Sacramento msa Employment analysis 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bureau of Labor Statistics (Includes Sacramento, Placer, El Dorado, and Yolo Counties) December 2007 Employment Level: 905,000 December 2013 Employment Level: 845,300 Jobs Lost: 59,700 (6.6% Decline) There are eight properties under construction in the region expecting to deliver 886 units during The largest of these projects is the Tower Bridge Commons property, with 270 units expected to be completed in early Q Sale activity for Sacramento apartments continues to be robust, with 47 transactions closing during 4th Quarter 2013 in the Sacramento region for properties of at least 5 units in size. It is important to note that most of those closings involved smaller properties, with only 16 of the closings for communities greater than 50 units in size. Sale activity remains strong as investors continue to seek this asset class for opportunities, particularly Bay Area investors seeking to achieve stronger yields than are currently available in Bay Area apartments. As part of every real estate cycle, trends in the Bay Area multifamily market eventually trickle their way up to I-80 to knock on Sacramento s door and leave their mark on the region s apartment fundamentals. This trend for the current cycle is continuing to gain momentum. We anticipate only small swings in occupancy and rental rates over the next four quarters as employment levels slowly grow, and the improved single family market continues to square off against the lack of any meaningful new apartment deliveries during the next 12 months. p. 5 Colliers International

6 MULTIFAMILY 4TH quarter 2013 Rental Rate Trends The overall average apartment market rent in Sacramento was reported to be $978 as of December 31, 2013, a nominal increase from the average rent of $973 recorded three months earlier, and a 1.5% increase from the $964 average rent level reported 12 months earlier. Similarly, the change in same-store rents improved slightly during 4th Quarter by 0.5%, and for the previous 12-month period by 2.8% (i.e., 4th Quarter 2013 average market rent was 2.8% higher than 4th Quarter 2012 average market rent for the identical group of units surveyed). Note that the difference in performance between the overall and the same-store statistics is due to the difference in units surveyed. Below is a summary of 4th Quarter 2013 rent performance for the different bedroom type and age groups of inventory in the Sacramento region. Average Market Rent $1,400 $1,300 Sacramento AVERAGE MARKET RENT ANALYSIS 4TH QUARTER 2013 C. Sacramento Orangevale/ $1,200 Davis/Yolo Cnty Fair Oaks/Folsom $1,100 $1,000 Roseville / Rocklin Natomas $900 South Sacramento N. Sacramento / $800 Citrus Heights N. Highlands $700 Arden/Arcade R. Cordova / E. Sacramento Carmichael $ Square Feet Average Market Rent Analysis A simple comparison of submarket rent levels is a useful comparative tool, but it is an analysis based on a static look at market rents, not taking into effect the interrelationships that exist between the various submarkets. The following analysis helps to overcome the inherent shortcoming of that approach. The approach taken to evaluate rents while considering the interrelationships is to determine an Average Market Rent Line established by all of the submarkets. In the graph above, an Average Market Rent Line is best fitted through all of the submarket average rent/average square-foot pairings. This line is a true representation of the average market rent across all square feet in the Square Feet horizon because it is based on input from all the submarkets. Once plotted, one can quantify how much above or below the market a specific submarket is based on the average square footage of that respective submarket. Market rent performance - 4Q 2013 category occupancy Market: $978 By Unit Type: Efficiency $736 1 Bedroom $836 2 Bedroom $1,012 3 bedroom $1,378 By Age: $1, s $1, s $ s $826 Pre-1970 $939 Submarket Average SF 4th Qtr 2013 Average SF (1) 4th Qtr 2013 Avg Market Line Rent (2) Difference From Avg Market Line (3) Central Sacramento 800 $1,337 $918 $419 Davis / Yolo County 864 $1,159 $994 $165 Orangevale / Fair Oaks / Folsom 907 $1,136 $1,045 $91 Roseville / Rocklin 927 $1,103 $1,069 $34 Natomas 895 $987 $1,031 (-$44) Citrus Heights 805 $857 $924 (-$67) South Sacramento 878 $937 $1,011 (-$74) Arden / Arcade 793 $792 $910 (-$118) N. Sacramento / N. Highlands 873 $886 $1,005 (-$119) Rancho Cordova / East Sacramento 838 $843 $963 (-$120) Carmichael 812 $766 $933 (-$167) Colliers International p. 6

7 MULTIFAMILY 4th quarter 2013 occupancy analysis market occupancy performance - 4Q 2013 category occupancy Market: 95.9% By Unit Type: Efficiency 96.4% 1 Bedroom 95.8% 2 Bedroom 95.8% 3 bedroom 96.3% By Age: % 1990 s 96.3% 1980 s 95.7% 1970 s 96.1% Pre % looking AHEAD Continue to expect only small fluctuations in apartment occupancy and lease rates over the next 12 months until the employment market in the region begins to add a meaningful number of new jobs. There needs to be more sustainable and significant employment growth in the region to affect more significant growth in the region s apartment fundamentals. The improved single family market, coupled with the significant decline in local foreclosure activity, has slowed the migration of homeowners back to the renter pool, and this decline needs to be offset by traditional employment-driven demand or local apartment fundamentals will begin to weaken. On the brighter side, the lack of any meaningful new supply for the next 12 months, coupled with limited new permit issuance activity, will continue to keep upward pressure on both occupancy and rates during the next 12 months. In addition to limited new supply, there are many other factors that will have some level of influence on Sacramento apartment occupancy and rental rates. Low U.S. mortgage rates continue to help in the buyer qualification process, keeping slight downward pressure on apartment occupancy rates. Down payment requirements will keep this pressure in check for now. Continued economic concerns are keeping many from considering home ownership currently, but that uncertainty will not last forever. Additionally, general lifestyle choices embraced by the up and coming home ownership pool are keeping some, by choice, a renter. With respect to the apartment investment market, we see fewer distressed deals available for sale. The distressed market peaked in 2010, with almost 33% of the sales that year involving a property having some form of financial distress. Currently, that percentage is below 20%. Transactions will continue to get consummated across varying unit totals. Investors continue to see the value in the current fundamentals of Sacramento s multifamily market, and ownership will continue moving forward on disposition plans to take advantage of those fundamentals. p. 7 Colliers International

8 MULTIFAMILY 4TH quarter 2013 Occupancy vs. Year-over-Year Change Occupancy Analysis Apartment Occupancy (Total Sample) 100.0% 95.0% 90.0% 85.0% 80.0% 75.0% 4 th QTR 2013 Occupancy is 95.9% 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Occupancy YOY Change in Occupancy YOY Change In Occupancy (Same-Store) 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Apartment Occupancy (Total Sample) 100.0% 95.0% 90.0% 85.0% 80.0% 75.0% + s s s Eff 1BR 2BR 3BR Pre By Bedroom Type By Property Age 1970 s Occupancy YOY Change in Occupancy YOY Change In Occupancy (Total Sample) 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% average market rent analysis Avg. Rent vs. Year-over-Year Avg. Rent Change Rent Analysis by Property Age Average Rent (Total Sample) $1,000 $975 $950 $925 $900 $875 $850 $825 $800 4 th QTR 2013 Average Rent is $978 YOY Change In Avg Rent (Same-Store) 5.0% 2.5% 0.0% -2.5% -5.0% 0.0% $ % -7.5% 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q $ % s 1980 s 1970 s Pre-1970 Average Rent YOY Change in Avg Rent Average Rent (Total Sample) $1,200 $1,100 $1,000 $900 Average Rent YOY Change in Avg Rent YOY Change In Avg Rent (Same-Store) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Multifamily Permits vs. Deliveries Cap Rate Analysis Total Units In normal conditions it takes approximately 9-12 months from start of construction to unit delivery. Units 886 Delivery Forecast Cap Rates 10.00% 8.00% 6.00% Trailing 12-month cap rate at end of 4 th QTR 2013 for Sacramento was 6.56% % The 5-YR Treasury is a very common rate used in apartment financing % 0 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q % Dec Sacramento U.S. 5-YR Treasury Permits Deliveries Source: U.S. Dept of Treasury, RCA, Costar Colliers International p. 8

9 MULTIFAMILY 4th quarter 2013 Sacramento Apartment Market Featured Deals Sale Comparables Map # Property Location # Units Sale Price Price Unit Price/SF Buyer Seller 1 1 Alexan Midtown 275 $70,000,000 $254,545 $ Alcatel-Lucent Trammell Crow 2 2 Da Vinci Court 51 $10,800,000 $211,765 $ Tilden Properties Bruce Unger 3 3 Foothills Tennis Village 268 $33,100,000 $123,507 $ Tomanek Group UDR 4 4 Lyn-Roc Senior Apartments 67 $6,000,000 $89,552 $ William Szymczak David Tyler 5 Hastings Ranch Apartments 132 $10,500,000 $79,545 $ Mike Brush Oregon Pacific p. 9 Colliers International

10 MULTIFAMILY 4th quarter 2013 Your Experts Multifamily Specialists Aaron Frederick Vice President Multifamily Investment Sales Bruce Hester Senior Vice President Multifamily Investment Sales Brian Nelson Senior Vice President Multifamily Investment Sales John Shaffer Multifamily Specialist Investment Specialists John Banchero Senior Vice President Investment Sales Steve Chamberlain Senior Vice President Investment Sales Heath Charamuga Senior Vice President Investment Sales John Jackson Vice President Investment Sales Colliers Management Ben Prater Investment Advisor Investment Sales Randy Dixon Managing Director Logan Dunnaway Research Analyst Colliers International Sacramento Brokerage Colliers International p. 10

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12 Colliers International 301 University Avenue, Suite 100 Sacramento, CA