2007 Summary 5+ Unit Apartment Buildings
from the 2008 Economic Forecast

History and Overview:

The local multifamily market featured a period of flat to depreciating values in the late 1990s through the end of 2001. Beginning in 2002 through the first quarter of 2005 there was an era of substantial appreciation. Beginning in the second quarter of 2005 the market began to cool. This cooling trend continued throughout 2007. As we enter 2008, the market is flatter, more predictable and balanced.

Speculative buyers have all but exited the market and the more traditional investor remains. Demand remains for quality, well-located multifamily properties. Properties in other than optimal locations, not at their highest and best use, needing further development or remodeling, with deferred maintenance or other challenges and properties outside core urban areas have not fared as well in the current market environment.

The 2007 Market:

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There was a substantial disruption in the residential credit markets that occurred in the third quarter of 2007. While the disrupted portion of the credit markets did not include apartment building loans, the effects rippled throughout the entire real estate lending and sales markets. During 2007 around three quarters of all multifamily sales of 5+ units on the South Coast area of Santa Barbara County occurred during the first half of the year.

Indicators of value – Price Per Unit, GRM and Cap. Rates for South Coast multifamily properties peaked during 2005. (See “Definitions” at the end of this document for clarification of these indicators.) I have broken out this data by subset: 5 to 9 units, 10 to 24 Units and 25+ Units and plotted trendlines to establish the direction of the market from 2003 to 2007 for a more recent overview and from 1993 to 2007 for a long-term overview.  

All three indicators show a calming market. The least volatile portion of the market has been the 25+ Unit segment. This is to be expected as investors in this portion of the market tend to be long-term players with less tolerance for speculative movement outside long-term norms. This section of the market shows the global movement towards a buyer’s market, but in a flatter spectrum.

Both the 5 to 9 Unit and 10 to 24 Unit segment of the market shows a much more pronounced change from 2005 highs. Price Per Unit is down substantially and there appears to be a convergence in all three segments of the market in the GRM and Cap. Rate factors. Numbers are now more sensible in all market segments.

The active trend for acquiring centrally located multifamily properties, renovating them and raising rents substantially continues. This trend has factored into around 50% of the 2007 purchases. Target properties are well-located, but underperforming due to deferred maintenance, management challenges or other correctable issues. Substantial capital is available for this activity. The South Coast has received a “vote of confidence” from investors interested in this approach. A very robust rental market exists for renovated properties in good locations.

However, these renovated properties have not produced many quick resales at substantial profit in this market. Several examples of efforts for quick profit have remained on the market after many months of marketing. This does not tend to trouble these investors as their return is not normally dependant on a quick resale. If cash is desired a post turnaround refinance is available.

Several larger multifamily sales occurred during 2007 ranging from $181,818 to $240,210 per unit with proforma GRMs of 10.40-12.94 and Cap. Rates from 4.89%-6.30%. The first half of 2007 included the sale of the 99 unit Villa Flores on the Eastside near Santa Barbara High School for $18,000,000, 49 units on the Lower Westside for $11,770,000 and the package sale of 108 units in two complexes on the Northside – the Continental and Lucero Village for $21,150,000.

Two larger sales occurred in Isla Vista during the second half of the year. A set of three buildings totaling 53 units located on Abrego Rd. and Seville Rd. sold as a package for $11,100,000. The 62 unit Tahitian located on El Colegio Rd. sold for $12,400,000 after being promoted as another rehab. candidate similar to the Breakpoint and Coronado projects undertaken in Isla Vista by Conquest Student Housing in recent years..

In the North County, two larger sales occurred. The 208 unit Country Oaks in Santa Maria sold in September for $30,250,000 and the 328 unit Windscape Village in Lompoc sold in November for $42,250,000. The GRMs and Cap. Rate factors for these properties – 10.57-11.03 GRM and 5.46%-5.65% were not too different from South Coast counterparts, but the Price Per Unit factors were substantially less at $128,811-$145,433.

UCSB occupies nearly 1,000 acres and provides an important dynamic in the local multifamily market. The prior Long Range Development Plan (LRDP) for UCSB expired in 2005 and plans are underway to update this plan through the year 2025.* An overall plan goal is to increase enrollment by 5,000 to 25,000 students through the year 2025 in increments of 1% per year. The current enrollment cap is 20,000.

The LRDP includes the goal of providing for virtually all increased housing demands on campus or campus-owned property. Housing goals include plans to provide for 50% of student housing on campus or campus owned property – up from the current 33%. The most immediate and visual example of this direction is the San Clemente Villages project on Storke Fields along El Colegio Rd. outside of Harder Stadium. This project consists of 325 apartments with 973 beds and is scheduled to open in the fall of 2008. The target applicants are single graduate students.

While LRDP promotional material suggests that all housing issues will be handled internally, it is difficult to imagine that the influx of 5,000+ new tenants plus faculty and staff will be neutral. The likely result will be more pressure on the local multifamily market.

The Rental And Loan Market:

The rental market has been very healthy. According to data supplied by Dawn Dyer of Dyer Sheehan Group, Inc.,** the overall rent increase for the Santa Barbara County – Combined South Coast Market Areas from October 2006 to October 2007 was 6.6% with a vacancy factor of 1.38%. We have a robust rental market with good demand.

The strongest market during the survey period has been Isla Vista with an 11.1% overall rent increase and a .15% vacancy factor. The weakest market has been Carpinteria with a .05% overall rent increase and a 3.53% vacancy factor.

Interest rates for multifamily properties spiked with the general market in the third quarter, but quickly dropped to current rates which are historically phenomenal. Currently, you can obtain a 30 year fully amortized loan fixed for the first three to five years in the high 5% to low 6% range. The most common indexes are tied to the one-year Treasury indices.

The Long Term View:

Conclusion and Forecast:

We are well into a cooling trend with a much better market for long-term investors. This is not a market aberration, but rather we have recently exited one. The rental market is positive with solid increases in excess of the general inflation rate and with low vacancy factors. Interest rates are exceptionally good. Capital is readily available. The long-term outlook is good with many demographic factors favoring South Coast multifamily investment.

General investor confidence is still weak which will tend to help those buyers who are willing to invest in the current market. Properties priced in line with the current environment will sell in a reasonable length of time albeit longer than in the fairly recent past. Entering 2008 GRM and Cap. Rate factors are expected to remain flat to changing slightly in favor of buyers with some increases in Price Per Unit due to the positive rental market.