Multifamily Report Sacramento Apartment Insights Volume 1 1 st Quarter 2013 Accelerating success.
Sacramento Apartment Market Q1 HIGHLIGHTS During 1st Quarter 2013 the Sacramento apartment sector continued to maintain solid fundamentals, but the improving home sale market, coupled with a weak local economy, is beginning to show signs of impact on those fundamentals. Average monthly rent during 1st Quarter 2013 declined from $964 to $962, and average occupancy in the market edged up only slightly by 30 basis points; with year-over-year average occupancy actually declining by 100 basis points. Though the local economy continues to be anemic, Sacramento s employment base did record positive year-over-year growth for January, February and March. The table on the right summarizes the performance of several of the leading apartment market indicators measuring the health of Sacramento s multi-family market. Some of the key takeaways from Sacramento s 1st Quarter 2013 market performance include: Overall market inventory remained at near full economic occupancy, ending the quarter at 94.9%, a slight increase of 30 basis points from the year-end 2012 recorded level of 94.6%. The average apartment market rent in Sacramento ended March 31, 2013 at $962, just slightly below the 2012 year-end average rent level of $964, and also slightly below the average rent level of $966 reported one year earlier. The change in same-store rents was reported at 0.4% for 1st Quarter 2013, and 0.3% year-over-year. (i.e., 1st Quarter 2013 average market rent was 0.3% greater than 1st Quarter 2012 average market rent for the same group of units surveyed). Multifamily permit issuance continues to remain low, with only 84 issued during 1st Quarter 2013, bringing the total issuance in Sacramento to 417 over the past four quarters. There were only 69 apartment unit deliveries to Sacramento s inventory base during 1st Quarter 2013, bringing the total completions to 766 over the past four quarters. As of March 31, 2013 there were eight multifamily properties under construction in the Sacramento area totaling 887 units, with all of those units expected to be delivered sometime before mid-2014. 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 and weak economy. KEY APARTMENT METRICS - 1Q 2013 Total Apartment Inventory 140,864 Quarterly Apartment Absorption 517 Trailing 12 Month Absorption 134 Quarterly Unit Completions 69 Trailing 12 Month Completions 766 Annual Increase in New Inventory 0.55% Market Occupancy 94.9% Change from Previous Quarter 0.3% Change from Previous Year -0.4% Average Market Rent $962 Same-Store Decline from Previous Qtr Same-Store Increase from Previous Year Trailing 12-Month Sacramento Apt Cap Rate *Please note that: 1. Change values refer to basis point change 0.4% 0.3% 6.1% Change from Previous Year 0.9% Trailing 12-Month US Apt Cap Rate 6.0% Change from Previous Year -0.1% 2. Same-Store refers to a comparison that is made querying the same exact group of properties between two points in time. MARKET INDICATORS VACANCY NET ABSORPTION 1 st Qtr 2013 Projected 2 nd Qtr 2013* DELIVERIES CONSTRUCTION LEASE RATES *2 nd Qtr 2013 over 1 st Qtr 2013 Change P. 2 COLLIERS INTERNATIONAL
KEY SUBMARKET HIGHLIGHTS During 1st 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 788 $1,269 $1.61 94.1% 231 (157) South Sacramento 896 $930 $1.04 93.8% 273 84 Natomas 899 $975 $1.08 94.9% 0 0 N Sacramento / N Highlands 882 $854 $0.97 92.2% 0 (113) Arden/Arcade 813 $806 $0.99 94.5% 0 (2) Carmichael 816 $750 $0.92 95.1% 138 242 Rancho C / East Sacramento 831 $822 $0.99 94.8% 0 14 Citrus Heights 802 $841 $1.05 95.5% 0 (37) Orangevale/Fair Oaks/Folsom 908 $1,116 $1.23 94.9% 55 0 Roseville/Rocklin 930 $1,070 $1.15 95.3% 0 (52) Davis/Yolo County 867 $1,149 $1.33 97.8% 69 155 SACRAMENTO AREA 766 134 Some of the key takeaways from Sacramento s 1st Quarter 2013 submarket performance include: Occupancy in the various submarkets remained relatively stable with only minor fluctuations in vacancy, up and down, across the 11 submarkets. Unit deliveries continue to remain low, with three submarkets recording unit completions above 100 during the last 12 months. Annual same-store rent growth was highest in the Central Sacramento submarket at 2.0%, followed by the Carmichael submarket at 1.7%. It is worth noting that in 7 of the 11 submarkets, rent recorded in 1st Quarter 2013 was higher than the rent level reported for 1st Quarter 2012, down from 8 reported submarkets during 4th Quarter 2012 activity. Concessions during 1st Quarter 2013 were highest in the Natomas submarket, averaging over 11.3% of the contract rate. In fact, during 1st Quarter 2013 the average concession metro wide increased from 6.8% to 7.5% of the contract rate. COLLIERS INTERNATIONAL P. 3
SACRAMENTO APARTMENT MARKET During 1st Quarter 2013 the Sacramento apartment market continued to maintain solid fundamentals, with inventory near full economic occupancy at 94.9%. It is worth noting that these fundamentals do seem to be reacting to an improving single family market and a continuing weak local economy. Occupancy seems to have leveled, while rents actually have shown some minor deterioration. Recent press has begun to draw positive attention to Sacramento s single family market, with this sector definitely showing signs of improvement. Home ownership statistics in the region remain challenged but improving, with the 1st Quarter 2013 home ownership rate for Metro Sac at 59.9%, an increase in the rate of 190 basis points from the 4th Quarter 2012 level of 58.0%. Additionally, more homes are being listed and sold in the region, and average pricing in the area is on the rise, up more than 25% in the last 12 months. This activity is moving more apartment renters back into the single family market, putting downward pressure on the average multifamily occupancy rate. Though market sentiment remains consistent that the multifamily sector is still leading the real estate recovery in Sacramento, the recovery will be slow due to the uncertainty surrounding the government influence present in the Sacramento economy coupled with the lack of definitive sources currently identified for future employment growth. Though the graph above illustrates the consistent yearover-year positive employment growth recorded in the four-county Sacramento region since early 2012, Sacramento will need to post stronger employment numbers to expedite and sustain a recovery in the multifamily sector. SACRAMENTO MSA EMPLOYMENT ANALYSIS December 2007 Employment Level: 905,000 March 2013 Employment Level: 827,800 2012 2013 Multifamily permit issuance in the Sacramento area remains low with only 417 issued during the past 12 months in the 4-County region. By comparison, there was an average of 3,450 multi-family permits (5 units or greater) issued annually in the same 4-county region from 2003-2006. The current development pipeline remains very minimal, and is unlikely to ramp back up significantly until the region produces a much larger renter pool via new employment, and lease rates climb back towards replacement costs. There are currently eight properties under construction in the region expecting to deliver 321 units during the remainder of 2013. Additionally, earth work has recently begun on Tower Bridge Commons, a 378 unit community in West Sacramento being built in two phases located across Tower Bridge Gateway from Raley Field. Sale activity for Sacramento apartments continues to be robust, with 37 sale transactions closing during 1st 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 6 of the closings for communities greater than 50 units. Sale activity is remaining strong as investors continue to seek this asset class for opportunities. Institutional investor interest remains only limited at this time, but we believe as economics in the region improve this metro area should end up back on their radar. It is important to note however that there were several institutional sales completed in the Sacramento area during the past 12 months. We anticipate only small swings in occupancy and rental rates over the next four quarters as employment levels slowly grow, and the improving single family market contrasts with the lack of any meaningful new product deliveries during the next 12 months. Jobs Lost: 77,200 (8.5% Decline) P. 4 COLLIERS INTERNATIONAL
RENTAL RATE TRENDS The overall average apartment market rent in Sacramento was reported to be $962 as of March 31, 2013, a minimal decline from the average rent of $964 recorded at year-end 2012, and a 0.4% decline from the $966 average rent level reported 12 months earlier. 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. AVERAGE MARKET RENT ANALYSIS In the following graph 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. This analysis reconfirms that the best performing submarket is Central Sacramento, with its average rent level of $1,269 being $362 above the market average for its respective average square footage of 788 SF, and the worst performing submarket is Carmichael with its average rent of $750 being ($179) below its respective market average. MARKET RENT PERFORMANCE - 1Q 2013 CATEGORY OCCUPANCY Market: $962 By Unit Type: Efficiency $734 1 Bedroom $820 2 Bedroom $993 3 bedroom $1,378 By Age: 2000+ $1,165 1990 s $1,041 1980 s $894 Source: 1970 s MPF Research $820 Pre-1970 $909 SUBMARKET AVERAGE SF 1 ST QTR 2013 AVERAGE SF (1) 1 ST QTR 2013 AVG MARKET LINE RENT (2) DIFFERENCE FROM AVG MARKET LINE (3) Central Sacramento 788 $1,269 $907 $362 Davis / Yolo County 867 $1,149 $970 $179 Orangevale / Fair Oaks/ Folsom 908 $1,116 $1,002 $114 Roseville / Rocklin 930 $1,070 $1,019 $58 Natomas 899 $975 $995 ($20) South Sacramento 896 $930 $992 ($62) Citrus Heights 802 $841 $918 ($77) Rancho Cordova / East Sacramento 831 $822 $941 ($119) Arden / Arcade 813 $806 $927 ($121) N. Sacramento / N. Highlands 882 $854 $981 ($127) Carmichael 816 $750 $929 ($179) 1. Submarket average rents as provided by MPF 2. These are rents that fall exactly on the Average Market Rent Line for the respective submarket s average square-foot size. 3. This is Column(#1)-Column(#2) above and represents how much the respective submarket s average rent is above or below the average market rent. It is a good performance test to determine which submarkets have higher average rents than the market average and which ones have a lower average rent than the market average, and by how much. COLLIERS INTERNATIONAL P. 5
OCCUPANCY ANALYSIS MARKET OCCUPANCY PERFORMANCE - 1Q 2013 CATEGORY OCCUPANCY Market: 94.9% By Unit Type: Efficiency 95.1% 1 Bedroom 95.1% 2 Bedroom 94.7% 3 bedroom 95.4% By Age: 2000+ 95.1% 1990 s 95.3% 1980 s 94.2% 1970 s 95.5% Pre-1970 95.4% LOOKING AHEAD Expect apartment occupancy and lease rates to experience only small fluctuations over the next 12 months as employment continues to only slowly improve. It would appear that the source putting bodies in units over the last 36 months has begun to dry up with the improving single family market; in fact, the volume of new short sales/foreclosures has declined considerably over the last 12 months. As we have been stating in many previous editions of this report, fundamentals will be impacted if Sacramento doesn t begin to create jobs at an accelerated rate, as employment is the traditional demand driver for apartments. 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 2013. In addition to limited new supply, there are 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. With respect to the apartment investment market, deals 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. Currently, unsuccessful bidders on Bay Area apartment properties continue to show interest in Sacramento, as competition for available properties is much leaner here in the Capital city. Cap rates remained steady in 2012 but could see further compression as interest rates remain low, as many cash flush companies are returning to the market, and many Generation Y consumers and Baby Boomers elect to forgo home ownership in lieu of renting. P. 6 COLLIERS INTERNATIONAL
OCCUPANCY VS. YEAR-OVER-YEAR CHANGE OCCUPANCY ANALYSIS Apartment Occupancy (Total Sample) 100.0% 95.0% 90.0% 85.0% 80.0% 75.0% 1 st QTR 2013 Occupancy is 94.9% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2011 2012 Occupancy YOY Change in Occupancy YOY Change In Occupancy (Same-Store) 6.0% 2013 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 2000 1990 1980 1970 By Property Age 1970 s 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 1 st QTR 2013 Average Rent is $962 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2011 2012 2013 Average Rent YOY Change in Avg Rent YOY Change In Avg Rent (Same-Store) 5.0% 2.5% 0.0% -2.5% -5.0% -7.5% Average Rent (Total Sample) $1,200 $1,100 $1,000 $900 $800 $700 2000 + 1990 s 1980 s 1970 s Pre-1970 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% 0.0% -1.0% -2.0% MULTIFAMILY PERMITS VS. DELIVERIES CAP RATE ANALYSIS Total Units 800 600 In normal conditions it takes approximately 9-12 months from start of construction to unit delivery. 437 Units Delivery Forecast Cap Rates 10.00% 8.00% 6.00% Trailing 12-month cap rate at end of 1 st QTR 2013 for Sacramento was 6.96%. 400 4.00% The 5-YR Treasury is a very common rate used in apartment financing. 200 2.00% 0 Source: Source: MPF MPF Research 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2011 2012 2013 2014 Permits Deliveries 0.00% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Dec 1 st Qtr. Sacramento U.S. 5-YR Treasury Source: U.S. Dept of Treasury, RCA Source: US COLLIERS INTERNATIONAL P. 7
Sacramento Apartment Market FEATURED DEALS SALE COMPARABLES Map # Property Name # Units Sale Price Price Unit Price/SF Buyer Seller 1 1 The Element 288 $37,000,000 $128,472 $141.11 Rob Marshall Michael Schwab 2 2 Wedgewood Apt Homes 125 $8,000,000 $64,000 $76.59 Jupiter Investment Sante Fe Management 3 3 Wright Place Apartments 41 $2,425,000 $59,146 $89.32 Kim Ibrahimzada Elliott Wang 4 4 Rosewood Manor 24 $1,300,000 $54,167 $67.71 Domus Properties James Johnson 5 1312 Drake Avenue 8 $1,050,000 $131,250 $112.71 Bernard Alfs Garth Watson 4 3 5 1 2 P. 8 COLLIERS INTERNATIONAL
YOUR EXPERTS Multifamily Specialists Aaron Frederick Vice President aaron.frederick@colliers.com +1 916 830 2584 Multifamily Investment Sales Bruce Hester Senior Vice President bruce.hester@colliers.com +1 916 563 3042 Multifamily Investment Sales Brian Nelson Senior Vice President brian.nelson@colliers.com +1 916 830 2576 Multifamily Investment Sales John Shaffer Multifamily Specialist john.shaffer@colliers.com +1 916 563 3035 Investment Specialists John Banchero Senior Vice President john.banchero@colliers.com +1 916 563 3050 Investment Sales Steve Chamberlain Senior Vice President steve.chamberlain@colliers.com +1 916 563 3006 Investment Sales Heath Charamuga Senior Vice President heath.charamuga@colliers.com +1 916 563 3094 Investment Sales John Jackson Vice President john.jackson@colliers.com +1 916 563 3033 Investment Sales Colliers Management Ben Prater Investment Advisor ben.prater@colliers.com +1 916 563 3060 Investment Sales Randy Dixon Managing Director randy.dixon@colliers.com +1 916 563 3023 Logan Dunnaway Research Analyst logan.dunnaway@colliers.com +1 916 563 3067 Colliers International Sacramento Brokerage www.colliers.com/sacramento +1 916 929 5999 COLLIERS INTERNATIONAL P. 9
Colliers International 301 University Avenue, Suite 100 Sacramento, CA 95825 www.colliers.com/sacramento COLLIERS INTERNATIONAL P. 10