WESTERN SNAPSHOT, MARCH 2009

Sacramento Apartment Market

Sacramento apartment sales activity fell 34 percent from $877,316,500 in 2005 to 2006’s number. After a slight up-tick of 5 percent in 2007, volume against tumbled nearly 19 percent in 2008, with last year’s 39 transactions marking a 60 percent decrease from 3 years earlier. August 2007 was the beginning of the city’s real estate downturn, and the numbers bear that out. As early February, a search and query of local brokerage houses and title companies reveal almost zero activity in terms of multifamily escrows.

A tale of two cities has developed in recent transactional history, with two distinct sales markets apparent. One is the newer, upscale complex, typically located in the Class A or B submarkets where the surrounding neighborhood is of newer development, that still sells in the 5.5 percent cap rate range. These areas have the advantages of new schools, substantial job growth, newer infrastructure, upscale retail, significantly higher priced single-family communities and overall higher-end demographics that command higher rents and value. These areas are in greater demand by tenants while nearby employment centers provide jobs that support higher rents. But even in these environments, recent sales of Class A projects closed escrow at roughly 70 percent of asking prices.

At the same time, properties of the Class C variety are selling in the range of $55,000 to $70,000 per unit primarily due to location and tenant market. These are typically older complexes built in areas that once were economic hubs. Over time, tenancy evolves to reflect that changing submarket. Infill locations are typically burdened with higher density, traffic problems, and less desirable services and opportunities for growth. As a result, given that tenants typically live where they work, local employment centers dictate rents affordable to that community, which ultimately affects revenue and value.

Recent development has mainly centered on condominium projects — more than 8,000 condo/townhome units are under construction, planned or proposed throughout the metro area versus only about 1,900 apartment units.

Regarding location, infill and redevelopment projects in central Sacramento are seeing the most activity. Excluding The Railyards project, more than 4,000 condo/townhome units are planned, proposed, or under construction in this area. Two major projects slated for the River District north of downtown are The Railyards and Township 9. The former is a redevelopment of the 240-acre Union Pacific railyard into mixed-use center. With infrastructure work expected to begin in summer 2009, the development will offer a mix of 12,000 market-rate for-sale/rental and affordable housing units, as well as entertainment venues, shops, restaurants and office space. Township 9, a $1.7 billion mixed-use project on 65 acres, is scheduled to begin construction in 2009. It will contain a residential mix of 2,700 market-rate and affordable condos, apartments, live-work units, and townhomes.

Another key downtown project is The Docks, a $500 million redevelopment of a former industrial site into a mixed-use project, which will include 1,155 housing units —condos, townhomes, apartments, lofts and live/work units.

Looking to the future, there is and will be a paucity of market activity until the banks are willing and able to provide debt. This will cause market perception to further tumble as potential buyers will look more and more to fundamentals for cash flow. The renewed mantra will be “in-place revenue, actual expenses, new taxes,” and a real 8 to 10 percent cash return. And given the decline of employment and continued job loss, prudent buyers will (or should) underwrite additional revenue loss in vacancy and concessions that will further negatively impact perceived market values. Current actual performance will be somewhat negated by tomorrow’s expectation — not good for sellers.

Steve Nelson is a partner in Hendricks & Partners’ Sacramento office.

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.