Bay Area Rents collapsing

[Sid Naik]

My tenant decided to move out from my rivermark condo in santa clara . I used to easily find tenants for $2700 ( 1 bed , 1 bath) . However its been 2 weeks and inspite of me lowering rents to $2350 I am not even getting a inquiry . for the first time i have posted on multiple forums zillow,zumper instead of my regular craigslist ad .

I had seen it in the news but experiencing first hand is convincing .

Though i am not happy about it, the prospect that rents are collapsing made me excited about the buying opportunity in multifamily that is coming in bay area . At this rate by December NOI and valuations should drop by 25% . Any thoughts ? I don't see much excitement about it in the forums yet .

[Johnson H.]

Sid, I look at OM's for bay area apartment buildings everyday and as much as I want values to decline and metrics to compress so that I can buy, I am not seeing a significant decline in values or NOI's at this time. There are a few reasons for this, first is that depending on the city, rent control has kept rents low so many times a turnover of a unit will actually increase NOI and gross rents even during these times. These mom and pop apartment buildings are older stock now also subject to state wide rent control and many are mismanaged with below market rate rents so turnover is a net benefit to them as well. I also look for value add buildings so rent roll would be far below market anyway and not affected by declining rent. Through my network and reviewing OM's, I am not seeing much COVID hardship with tenants so NOI's havent fallen that much due to it. Finally, good buildings fairly valued are still being purchased quickly, with low interest rates as investors are searching for yield and taking advantage of debt in the 3s and even in the 2s in some rare instances.

Those buildings not subject to rent control are new construction apartment buildings which has rents all at market rate before COVID and I know those are hurting in SF now. So your logic actually applies to a REIT like Avalon Bay who owns new construction buildings with no rent control and pushed rents considerably higher in the past years with a stock that now trades 36% lower than pre COVID. Your logic also applies to a building that has previously all market rate rents but those are rare and usually not the greatest purchase because there is no value add component.

However, real estate does not move as fast as the stock market so I think there will be some opportunities in the future but not as significant as your line of thinking. There has been some price declines on older buildings in SF but they started off with high listing prices and are coming back down to earth. There are still deals to be had and I know investors still picking up assets at great prices. They are not day one cash cows but that is not the play here in the bay area anyways.