The View from the Top (of the market)!
October 2, 2015
People always ask me, “Are we at the top yet?” Quickly followed by, “How do you know?”
There are certain tell-tail signs seasoned investors look for. And looking at the strong and steady indicators of the Silicon Valley multifamily market, I can say with confidence that we are indeed at the top of the market.
First, values are at an all-time high, driven of course by demand. Inventory is almost non-existent and capital remains cheap, which means banks are aggressively in the market to lend to those who are hot to buy. Values are also driven by income, and since rents have continuously risen for the last four years, owners are reaping the benefits. Of course rents are strong because of the sheer number of Jobs! The local economy is very robust – among the strongest in the Nation – and high-tech employees are in high demand.
Investors looking at Santa Clara and San Mateo Counties quickly gravitate to a few factors. First, our occupancy is almost permanently fixed at 97% or better. Even banks are now underwriting at a 3% vacancy rate, as opposed to the more traditional 5%.
Values are also exceptionally solid, approaching $300,000 per unit for a combined Class A/B/C product types across Santa Clara and San Mateo Counties. Of course, the price per unit varies wildly depending on condition and area. And rents are almost at an all-time high and still growing. The five-year average rent for studios is up almost $400 to $1,465 per month, one bedrooms are up $837 to $2,269 per month and two bedrooms are up $713 to $2,473 per month.
This perfect storm of demand and value is further enhanced by institutional investors and international money flooding in from Asia, most notably, China. They’re also watching the success of local leaders like Apple, Facebook, Google, LinkedIn and countless start-ups gone public or purchased by the larger players, and parlay that into a verdict: When it comes to multifamily, Silicon Valley paints an undeniably positive economic picture, making it one of the most secure places in the world for investors to park their money.
A number of buyers are coming into the area and renovating and repositioning properties to take advantage of the higher income employees looking for more appealing amenities. Indeed, with demand outstripping supply, it can be difficult for owners to keep rents up to market level. In my discussions with local owners, many are raising their 8% – 10% annually, yet they are still behind the market.
In truth, our market today looks much like the run-up to 2007. Interest rates have only one place to go, and the Fed is hinting of an increase in the Fall. Cap rates are also extremely low, with many larger properties trading at sub-4 percent.
The big question is: How much longer will this last? If the Fed raises rates (likely) the effect will be a dampening of values as capital becomes more expensive. Heading into an election cycle, much is calm now, but what will happen post-election? And we haven’t even talked about the slowing Chinese economy or other world events.
If you’re considering selling, is now the time? If you don’t sell, are you in a position to hold through the next cycle? These are questions that owners should be asking themselves now.
If you fall into the potential seller category, I have a bevy of buyers ready to move on almost any size property. And for Sellers wishing a quiet sale, I can even facilitate off-market negotiations that still land top dollar. These buyers are willing to consider all types of properties – from older assets with below market rents and deferred maintenance to the true turnkey, trophy properties.