Sacramento’s market for multifamily investment is still attractive, with multiple buyers vying for the available properties.
But at least one commercial real estate firm believes the peak is firmly in the rearview, with sales of all kinds, but especially at the higher end, down significantly from a year ago.
John Shaffer, a partner in the apartment advisory team at Colliers International Sacramento, said there’s nothing unusual about the drop in sales. Real estate is a cyclical business, and at the higher end of the market, institutional investors put a lot of effort into knowing where the peak is, he said.
“They want to buy into a market that’s still rising,” Shaffer said. According to Colliers’ data, the Sacramento region’s multifamily sector hit its peak for the most expensive sales about a year ago.
In the second quarter of 2016, multifamily property sales of $20 million or more cumulatively reached more than $1 billion over that and the three previous quarters, after hitting only $236 million in the 12-month trailing period three years earlier.
Since then, however, the trend has gone the other way, with $948 million in sales in the 12-month trailing period during the third quarter of last year, and $698 million in the first quarter of this year for the preceding 12 months.
Overall, listings of multifamily properties at all price ranges have dropped. In November 2015, there were 94 properties on the market; that figure is 37 this month. The cumulative asking price for all multifamily properties on the market was $238 million in the second quarter of 2016, while today it’s $109 million.
While pullback by institutional investors helps explain the trend, other factors also play a role. Shaffer said his team is increasingly seeing a spread between what buyers are willing to pay and what sellers are willing to accept. As appreciation has raised values, it’s squeezed cap rates, or the margin between price and expected income.
“It’s getting harder and harder to make the numbers work,” Shaffer said.
Sellers also have to take into account their next move if they do unload a property. To avoid taxes, they have to buy another one, and with inventory limited, there are fewer options to do so.
Those factors combined mean while buyers still clamor for properties, a seller has to have a good reason to sell. In the meantime, vacancy rates are likely to remain low, so there’s not much downside in holding onto a property, Shaffer said.
Two other factors will dictate what existing owners decide to do in the next few years. In the region, Colliers is tracking 2,200 apartment units under construction at the moment, the largest number since late 2007. As those are completed, they’ll be a relief valve for renter demand outstripping apartment supply.
At the same time, Shaffer said, the double-digit rent hikes in multifamily of the last few years are also unsustainable. To keep them rising that fast, and keep vacancy historically low, would require local economic growth of 4 percent to 5 percent annually, or nearly double actual growth of recent years.