The Time is Now!
May 25, 2016
In my last newsletter, I noted that we’d hit the top of the Silicon Valley multifamily market. Now, we’ve reached a time for action. If you’re an owner looking to hold, it’s time to get strategic. Use the time we have left in this strong market position to ensure your units are updated to top quality standards and that your exterior façades outshine all others on the street. Then bank excess capital so that you have the financial resources to maintain until the next market upswing.
However, if you’re an owner who is considering selling in the next five years, my earnest advice is: don’t wait! Today’s market offers tremendous opportunity. Values are at historic highs and renter demand continues to hold strong. This is thanks, in part, to Silicon Valley’s robust tech employment market and its growing “renter by choice” community – a demographic that includes Millennials, Baby Boomers and all those in the population at large who can’t afford our area’s high home prices. Finally, capital remains very accessible. In many cases, buyers are able to secure loans at sub-5 percent for all property types, even Class C.
This has the market flush with investors ready to jump on virtually all opportunities. Even those who won’t typically consider assets below 100 units or who tend to only buy Class A units are acting on properties half this size and outside of their traditional product parameters.
In my practice alone, I have more buyers than inventory. These individuals still see Silicon Valley’s strong job growth, strong local economy and strong local track record – where multifamily has been one of the most popular property types for the last three years – as all the proof they need to jump in with both feet. And they’re still willing to pay historically high prices, averaging from the mid-$200,000 to more than $625,000-per-unit (depending on location and condition), to gain entry into that scenario.
All of these factors place us smack dab in the middle of a major seller’s market.
Of course, there are other market factors that owners and investors must weigh in their decision. For example, while local rent growth has soared in the double digits for the last four years (making it hard even for owners to stay current with market rates), that momentum slowed significantly during the second half of 2015, and we’re now starting to see signs of softening. At my own building, I’ve seen rent growth decline from 10+ percent increases down to the single digits. If Silicon Valley rent growth has in fact peaked, it will impact the income of buildings and, in turn, their value.
New multifamily product also continues to deliver. Many of these units are Class A, with the amenities to attract Millennial and Baby Boomer renters, but possibly at the expense of Class B and C occupancies. As a result, owners should be prepared for vacancies to creep up slightly and for units to take a bit longer to rent at less aggressive rates. What will the election bring? How will the Fed manage interest rates? How will global economies impact U.S. markets? Will local rent control initiatives come to fruition? While even Warren Buffett says U.S. economic fundamentals are strong, these are indicators that encourage caution.
Here, then, the question remains. If you are planning to hold, you still have time to position yourself for the next down cycle. However, if you’re ready to sell, the time may be now. I said this in 2007 and I’m saying it again: Now is the time!