February Recap: CAP rates rising as interest rates are still high

It has been the wettest January in 40 years, and as owners of multi-unit buildings, we have seen the cost.

Replacing flooded water heaters, replacing broken mailboxes, and roof leaks, to name a few!

Many more companies are starting to have employees back to the office, at least 2-3 days per week.

This will increase demand as people will need to be close to their work.

Alameda County should end the eviction moratorium within 60 days.

This should make filling vacancies quicker and a small increase in market rents.

Interest rates have been consistent, although a slight uptick in the last 3 weeks. So, now buyers and sellers have a sense of the current investment market.

The majority of buyers are not too concerned about interest rates as a large percentage are paying cash or a large down payment.

Buyers are looking for higher returns.

Sellers are still getting strong offers for properties that are in good locations, and properties with stable rents and no deferred maintenance issues. In the current environment, CAP rates are slightly up, and gross rent multiples (GRM) are slightly down.

Offering “temporary rent reduction” has lured people to come view the units. The multi-unit market is still strong, although with some cooling! The shock of rising interest rates has cooled a bit. Mortgage rates are slightly up for the last three weeks.

Once the Federal Reserve Bank gives more direction, the investor market will have a clearer picture of the path forward. Market rents are still down throughout the Bay Area, but they are starting to slowly get closer to pre-Covid numbers.

The good news is that we have seen this before and the Bay Area always comes back. Here is a reminder of the economic report from William Frey of the Brookings Institution. He is an expert on economic trends.

He predicts that college educated professionals will start coming back, as will foreign professionals, and they will continue to re-locate to markets like Los Angeles and the Bay Area.

“I don’t think we should see California as being a long-term population loser. Immigration will come back”, William Frey, Senior Fellow with Brookings Institute.

As mentioned above, the San Francisco Bay Area area is the only metro in the top 30 that still has rents below pre-Covid rents.

As they slowly inch up, we are getting closer to pre-Covid market rents.

For the East Bay, now that we are after the Holidays, we should see more people ready to relocate, from the City or from out of the area.

Hopefully, we will see a slow, steady growth of rents as more companies set their back to work/hybrid work rules.

As far as the news reports that many buyers now priced out of the market due to rising interest rates, will now become renters, we will have to wait on that. It may deter current renters who were thinking about buying. This would lower the overall vacancy rate.

If you are having trouble getting a vacancy filled or have questions, please reach out.

Remember that it is better to do a “temporary rent reduction” rather than lowering the rent. This is true for existing tenants and new tenants.

If you are thinking about selling in the next 6-12 months, then starting the process now would be a good idea. The market is strong, as buyers are still paying prices based on income that is similar to Pre-Covid.

Then the issue that has come up is: How do I defer the capital gains taxes.

1) Delaware Statutory Trust. Click DST Tax Deferral,

2) Doing a 1031 tax deferred exchange.

With regards to doing an tax deferred exchange, I have spent some time searching in solid markets (Seattle, Austin, and Reno) for both commercial Triple Net (NNN) opportunities and multi-units that are all delivering at least a 5% CAP rate return.

Click: 1031 Exchange Opportunities

I did a presentation on increasing your rental revenue at the East Bay Rental Housing Association in January. Click Here: Maximizing the Return on your Investment for the highlights.

Please reach out if you are interested in getting more information on the DST option or 1031 exchange.

My most recent transaction, a duplex in Berkeley, went into contract at $50,000 over list price, very short closing and no issues. If priced right and marketed fully, sellers are getting very strong offers.

For example, if you want to sell your apartment at this time, I can help you with an evaluation and guidance.

I have spoken to two of the top lenders for East Bay multi-units and they are working on, and closing transactions at this time. I can forward their contact info if you want to speak with them.

Right now, if buyers have a good down payment they can get a loan and I can navigate you through the process.

It is always important to get guidance and advice from experienced multi-unit brokers who will market your property extensively to all potential buyers and brokers. Posting a new building on all websites and sending out emails blasts gives the property visibility to literally tens of thousands of potential qualified buyers.

Looking forward to a great 2023!