Data Collection and Income & Expense Analysis of Apartment Buildings

Data Collection and Income & Expense Analysis of Apartment Buildings

Here is the first post in many to come on analyzing residential income properties. This is directly from my course on property valuation and analysis.

Learning Objectives of this Post on Analyzing Apartment Buildings and Residential Income Properties: Data Collection and Income & Expense Analysis

  1. Identify sources of data
  2. Describe the components of an income & expense sheet
  3. Understand how to arrive at Net Operating Income (NOI) from Gross Scheduled Income (GSI)

The first step to accurately determine the market value of a real estate investment is a solid program of data collection and analysis. Each property will have its own unique considerations

All should at least begin with:

  • Property type
  • Overall condition of the improvements
  • Type of construction
  • Neighborhood analysis
  • Overall market conditions
  • Income and expense analysis
  • Legal requirements, zoning etc
  • Comparable property data

This list is broad in scope, but it’s a good foundation for the data collection plan. The data collected from the market on comparable type property will be used to determine the appropriate capitalization (CAP)  rate and make market comparisons in a later step. Unsure of what a Cap Rate is? Check out my blog post that explains everything you need to know about this powerful valuation metric.  The next step is the actual collection of the data.

Data Sources

The data required for the analysis is obtained from many of the same sources as the information used in residential sales.

  • Owners records
  • Multiple Listing Service (MLS), Costar, Loopnet, Commercial Agents & Property Owners, Public records
  • Census data
  • Chamber of Commerce
  • Local Housing Authority
  • Appraisers
  • Trade associations
  • Local Council of Governments
  • Tax assessment records

This should give you an idea of a few of the possible sources of data and the steps to begin the data collection process. Once the data has been collected the next step is the analysis of the data.

The Operating Report (Profit and Loss Statement)

When analyzing a real estate investment, we begin with an existing operating statement, also known as a profit and loss statement. The operating report will consist of both income and expense items attributable to the property. In the first step of the analysis, we will only be concerned with the cash income and expense of the property. We will consider depreciation and other non-cash benefits in a subsequent calculation.

Gross Scheduled Income

The gross scheduled income is the amount of money that the property would produce on an annual basis if it were fully occupied. Included in gross scheduled income would be any income attributable to the property from non-rent sources.

What types of sources can be included for determining gross scheduled income?

These sources could include income from laundry and vending machines, parking and storage fees, as well as other owner operated concessions.

When analyzing the gross income, consideration is given not only to the existing rents being charged, called contract or current rent, but also economic or market rent, which is the rent the property would command if it were available for rent in the current market. An adjustment can be made to the gross income if the market indicates that market rent differs from the actual rent. If such an adjustment is made, that should be plainly noted on the operating statement (see loss to lease).

 

Vacancy & Collection Losses and Effective Gross Income

The chief component in the calculation of effective gross income is the vacancy and collection loss rate. Most properties are not expected to remain fully rented for the entire period of ownership. When a tenant vacates, often there is at least some rental income lost during the turn over period due to repair or remodeling time. In addition to this consideration, one must face the reality that there may be a situation where a tenant becomes unable or unwilling to pay rent as agreed. In this circumstance there will be some rental income lost.

The vacancy and collection loss is usually expressed as a percentage of the gross annual rental income. There are several generally accepted methods for determining the amount of the vacancy and collection loss

  •  Historical data on the subject property
  • Published figures for the community
  • Market analysis

Other places to get historical operating data is

None of these things by themselves will probably give you a 100% complete picture but combining different resources the picture will become much clearer.

Historical data and market analysis are perhaps the most accurate, because typically published figures for the community are an average, and may not be representative of the property you are analyzing. Once the appropriate rate has been developed, the loss is subtracted from Gross Scheduled Income to derive at Effective Gross Income.

Example:
Gross Scheduled Income $12,000
Vacancy and Collection Loss (5%)  (600)
Effective Gross Income   $11,400

Gross Operating Income

To figure the gross operating income you go through the following steps:

Gross Scheduled Income
– Vacancy & Credit Loss
= Effective Gross Income
+ All Other Income (garage rent, laundry income, vending, etc)
= Gross Operating Income

The figure derived from this process is what we will call rental income. This is the actual income received after taking into account vacancy and credit loss against potential income.

Other income can come from a variety of sources. In apartments, it is quite often laundry, but it could be rental on furniture for furnished apartments, garages, etc.

The resulting figure of gross operating income is all the income left over after subtracting out the above mentioned items. It is your actual income in hand before expenses. Therefore it is a very important number.

Operating Expenses

The next step in the analysis process is to determine the total operating expenses for the property. Like income, expenses will be analyzed on an annual basis. The investor will do a detailed analysis of the expenses of a given property, so it benefits the practitioner to have done a thorough analysis in the beginning.

It is important to carefully analyze all categories of expenses to accurately portray the financial condition of the property. There are different categories of expenses, depending upon the type of property you will be analyzing, however all expenses are segregated into two basic categories, fixed expenses and variable expenses.

What are three fixed expenses and 10 variable expenses?

Fixed Expenses

A list of typical fixed expense categories will include

  •  Property taxes
  • Insurance
  • Landscaping and service contracts
  • Any expense that does not change from month to month

What determines a fixed expense is the fact that the expense will not vary in response to changing levels of occupancy.

Do not include mortgages as part of operating expenses!Mortgages are not part of operating expenses and are categorized elsewhere.

This group of expenses is not difficult to document for your analysis, but be careful to consider the fact that these expenses may not be the same for a new owner; i.e., the building insurance may go up and most likely the real estate property tax may be reassessed upon transfer.

Real Estate taxes can be one of the largest expenses so make sure to calculate any new tax increase or decrease in your analysis.

Variable Expenses

This category of expenses is much longer, and categories to consider will vary depending on the type and size of the property under analysis. This category will include all of the expenses necessary to maintain the income stream of the property and to provide agreed upon services to the tenant. To attempt a comprehensive list of all expense categories for all types of properties might be impossible and, certainly, is beyond the scope of our study. We will discuss the more common types of expenses in some detail, remembering that each property has unique characteristics and may include its own unique expense categories.

Off-Site Management

Many properties will be managed completely by off-site personnel. The cost of off-site management is determined and subtracted as an expense of operation. It should be noted that a management expense is a valid deduction from income even if the owner is managing the property. There are many firms specializing in this field; they usually charge between 4% and 10% of the rental amount.

 Payroll On-Site Personnel

Resident management is used when the day to day activities of the property require constant supervision. A resident manager is sometimes given free or reduced rent. If that is the case, you must include the managers unit rent in gross scheduled income, then enter the amount of free rent as an expense. In California, if a property has 16 or more units it is the law to have a resident manager on site.

 Expenses/Benefits

This would be for other management costs. For instance, office and administrative expense, performance bonuses paid to an on-site manager, and any health insurance or retirement plan contributions would be listed here.

Taxes – Workers’ Compensation

Whenever there is an employee, there are various taxes the employer is responsible for. Among these are: Social security tax, unemployment tax, as well as local, state and federal income taxes. These taxes are payable by the employer, and in addition, the employer is required to withhold some amount from the employee’s pay and forward it to the IRS.

Repairs and Maintenance

This is the total amount of repairs and maintenance necessary for the year. This would not include any money spent on capital improvements. A capital improvement is any improvement which substantially increases the useful life of the property. If you find a property which has not had any maintenance expense in the recent past, you will probably find a trade off in the overall condition of the property.

Utilities

This is probably the most difficult portion of the operating statement to complete accurately. This information is most easily obtained from the owner. NOTE: If the owner is paying the utility bills and is then reimbursed by the tenant, the full utility cost will be listed here and the amount reimbursed to the owner would be listed as other income (this is referred to as R.U.B.).

Accounting and Legal

This is the amount for the bookkeeping required on the property. It will include any amounts paid for payroll reporting or for monthly profit and loss statements. This should also include any legal expenses associated with evictions, drafting of leases, etc.

Advertising, Licenses and Permits

Many larger properties will have ongoing advertising expenses. At the very least there will be some cost at each vacancy. This includes the amount spent for advertising, as well as any licenses or permit charges; e.g., city business license, pool inspections, and/or housing code inspections.

Supplies

This might include supplies for the vendors mentioned previously: Bug spray, batteries for smoke detectors etc.

Miscellaneous

That’s right! There should always be a category for those expenses too insignificant to warrant their own category. This would include any additional expenses which were not accounted for elsewhere in the analysis.

 Contract Services

These are services which are supplied by outside vendors not already accounted for under fixed expense categories. These are additional services such as maintenance contracts, design services, appraisals and as many others as necessary.

Here is a list of the more common expenses in alphabetical order. Some of them we list without explanation because they are rather obvious:

  • Accounting and Legal expense
  • Advertising
  • Gas
  • Insurance
  • Licenses and permits
  • Miscellaneous and other expenses Property Insurance
  • (Property) Management
  • Payroll and Workers Compensation
  • Real Property Taxes
  • Repairs and Maintenance
  • Services
  • Sewer
  • Supplies
  • Telephone
  • Utilities (Such as the electric bill)
  • Water

Total Operating Expenses

This is the total of the expenses calculated. This is not to include vacancy or credit losses. Remember that what we are attempting is to give as accurate a picture as possible of the property’s financial condition. The property’s value will be dependent upon the ability to produce income, so it is important to be as accurate as possible in estimating both income and expenses.
The total operating expenses are now subtracted from the effective gross income.

Example:
Effective Gross Income $11,400
Total Operating Expenses (4,500)
Net Operating Income $ 6,900

Net Operating Income (NOI)

The net income that a property is capable of producing will be one of the first indicators of the worth of an investment. Later when we begin to apply the capitalization rate to the property, the NOI will be used to estimate total investment value.

The calculation of the net operating income does not take into consideration the effect of any potential financing of the property. This may seem odd at first, but in consideration, it will not take long to realize that the property should have a value that is completely independent of any financing that an investor might use to acquire that property.

Measure NOI correctly in order to properly value property

NOI is arrived at as follows:

Gross Operating Income
– Operating Expenses
– Capital Expenditures
Net Operating Income

Sales Proceeds

The sales proceeds that come from divesting yourself of a property are as follows:

Sales Price
– Selling Expenses
= Net Sales Proceeds
– Adjusted Basis _
= Taxable Gain
– Depreciation _
= Capital Gain / Loss

 

Data Analysis

Having discussed the income and expense analysis in detail, we will concentrate on the balance of the data and other considerations. The property will be analyzed for the following:

  •  Income quantity
  • Income quality
  • Income durability
  • Special risks

All of these considerations will be compared to other investments available in order to determine the appropriate rate of return and measures of value for the property being analyzed.

Test Your Knowledge: Data Collection and Income & Expense Analysis Questions

1. What is the chief component in the calculation of effective gross income?

2. How do you come to Effective Gross Income?

3. Circle the following that are considered an operating expense:

Property taxes Insurance The owner’s income taxes
Mortgage debt service Payroll taxes Utilities
Property maintenance

4. How do you arrive at NOI from Gross Operating Income

5. How do you arrive at the capital gain / loss from the sales price?

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5 Ways You Can Protect Yourself From Real Estate Wire Fraud

5 Ways You Can Protect Yourself From Real Estate Wire Fraud

Real Estate Wire Transfer Fraud Gains Momentum

  • A new type of wire fraud is beginning to target and impact homebuyers
  • Real estate transactions in today’s world often involve the wiring or electronic funds transfer (EFT) of money to complete a deal.
  • Buyers are being tricked into wiring their entire down payment on the day of closing to a fraudulent offshore account, often by cyber criminals who have spoofed or hacked their realtor or title company’s professional email account.
  • The losses from these wire scams are typically not insured or reimbursed by the bank because the wire transfer goes overseas.
  • Victims of these scams have sometimes lost up to six-figure sums and have had to cancel plans to buy their dream homes.
  • The California Department of Real Estate (DRE) has issued a consumer alert for real estate wire fraud.
  • This article will give you 5 tips on how to protect yourself or your client during your next real estate transaction.

Imagine This Scenario

You’re about to buy the home of your dreams when you receive an email from your realtor or title company saying there has been a change of plans. The email explains that you need to wire your down payment by tomorrow morning to a bank account belonging to the seller. Eager to close, and to trust the legitimacy of this email, you wire over your hard-earned down payment to the bank account requested. The next morning you decide to call your realtor and discuss what is next only to find out they never sent any such email. Your down payment is now gone, and you’ve just been the victim of an increasingly common form of financial fraud – real estate wire transfer fraud. 

Why Wire Transfers Are A Problem

The above story may sound crazy, but it is entirely accurate. According to the National Credit Union Administration in 2016, the number of fraudulent wire transfer scams reported by title companies and real estate agents increased by 480%. These numbers are alarming and indicate a real crisis that is impacting thousands of American homebuyers. While a typical wire fraud may only net a few hundred dollars, real estate wire fraud can net a cybercriminal anywhere from a few thousand dollars to hundreds of thousands of dollars. This can wipe out the would-be homeowner’s bank accounts and create lasting financial hardships.

How the Scam Works

  • Hackers will typically compromise a real estate agent or title company’s email server and search for upcoming closings.
  • The hacker will then email the buyer with legitimate-looking wire transfer instructions (sometimes as soon as the day before closing) requesting that the down payment is transferred electronically to a different account.
  • Once that money is transferred, it is GONE for GOOD. Banks, financial institutions, and the government typically cannot ensure this type of transfer because the accounts are offshore.

What makes this even more difficult is how skilled hackers are becoming. Often, they will use authentic-looking company logos, language, and personal information designed to make you feel comfortable.

  • Email is a commonly used method for transfer of information and documents in a real estate transaction – making it even more difficult for targets to spot.

What You Can Do To Avoid It

  1. Be aware – as a homebuyer be mindful that you could be a target for scammers. Look for potential red flags which include a sudden change of plans, misspellings, poor grammar, an increased sense of urgency, and emails sent outside of regular business hours.
  2. Use alternatives whenever possible – Instead of using electronic wire transfers, use cashiers checks and get a receipt. With smaller transactions, you may be able to use personal checks or a credit card and obtain a receipt, which will give you a proof of purchase.
  3. Obtain Numbers –  Get the phone numbers and account numbers of the real estate agents and escrow-holders at the beginning of the real estate transaction, and be sure to use those throughout the transaction. This provides you absolute proof you are transferring money to the right accounts.
  4. Call first – Even as legitimate as they may seem, never act on an email request to transfer funds electronically without verification. If your agent requests that you need to transfer money electronically this way, always call the number provided at the beginning of the transaction and verify the email request to transfer funds. Even better, transfer the money in person with a cashiers check. This way you can see directly who you are sending the money to.
  5. Keep it confidential – Never offer any sensitive personal information such as social security numbers, credit card numbers, bank account numbers, or financial details via email or text message. ALWAYS and ONLY enter this type of information on an encrypted website or give the information in person.

Taken directly from the DRE, here’s what you can do if you or someone you know has been a victim of real estate wire fraud.

If you (or your clients) are victimized, it is critical that you or your client contact your depository institution and the Federal Bureau of Investigations (FBI) immediately to have a chance at halting the criminal transfer. File a report with the FBI by calling a local FBI office or reporting online at FBI Internet Crime Complaint Center.  Their website is: bec.ic3.gov

Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of Gabhart Investments, Inc. The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

What Does Gabhart Investments, Inc, Do?

Gabhart Investments, Inc, one of the top real estate companies in San Diego. We do residential real estate, commercial real estate, and manage a syndication of private investors; specializing in acquiring and renovating single & multi-family properties.

We have done over $250 million in real estate transactions, have been featured on TLC‘s Flip This House, won several awards with the San Diego Business Journal, and have the distinctive CCIM Designation (Certified Commercial Investment Member).

If you’re interested in learning more about how Gabhart Investments can help you meet all of your real estate needs, please don’t hesitate to give us a call 858-356-5973 or email us

San Diego Rent Control and Vacation Rental Update Lunch & Learn

San Diego Rent Control and Vacation Rental Update Lunch & Learn

San Diego Rent Control and Vacation Rental Update Lunch & Learn

San Diego Rent control and restrictions on short-term vacation rentals could have devastating impacts on the San Diego real estate market and economy. Are you an investor, real estate professional, landlord or even a resident that is interested in discovering how this could impact you? It’s time to educate yourself and let your voice be heard. 

In this interactive and informative 60-minute class, Curtis Gabhart and an expert panel of speakers will present an in-depth overview of both San Diego rent control and restrictions on short-term vacation rentals.

Topics include

  • San Diego Rent Control
  • National City Rent Control
  • Financial modeling displaying how rent control could impact property value & NOI
  • Short-term vacation rentals impact on the real estate market

San Diego Rent Control

Guest Speaker Bio’s

Molly Kirkland: Molly has been serving the San Diego region in the governmental affairs field for well over a decade. For nearly 7 years, she has served as the Director of Public Affairs for the San Diego County Apartment Association (SDCAA).  Prior to working with SDCAA, Molly worked in Government Affairs and Communications for the San Diego Association of REALTORS.

Richard A. Snyder, CPM: a Real Estate Professional for over 30 Years, is the President and Owner/Broker of R.A. Snyder Properties, Inc., located in San Diego California, where he is a recognized leader in the Real Estate Industry. Rick is a Past President of San Diego County Apartment Association and he continues to lead as Co-Chair of the local effort to defeat Rent Control in National City and the local No on 10 Statewide campaign to protect Costa-Hawkins.

Christine La Marca: is a San Diego native with over 20 years of residential property management experience.  She is responsible for the day-to-day management of her family’s real estate portfolio. She is the Immediate Past President of the San Diego County Apartment Association, and she is currently still actively serving the Association as Co-Chair of the local No on 10 Statewide campaign to protect Costa-Hawkins and the local efforts to defeat Rent Control in National City.

Check out Curtis’s San Diego rent control blog post to catch yourself up to speed before you attend.

Click Here to Check it Out

Date

Tuesday, September 18, 2018

12:00-1:00PM

Location

Keller Williams Carmel Valley

12780 High Bluff Rd Ste 130

San Diego, CA 92130

We would be thrilled if you could join us for this special event. Lunch will be provided to those who RSVP in advance. Space is limited so please register as early as possible. Additional details are listed below.  To RSVP, follow the ticket prompt below confirming you will be in attendance or recommend someone else from your office if you are unable to attend. Thanks very much!  We hope to see you there!

 

The presentation will be hosted by Curtis Gabhart, CCIM 

Curtis Gabhart has been a successful Real Estate professional for more than a decade. He has a Certified Commercial Investment Member (CCIM) designation from the CCIM Institute. He is a Director at Keller Williams Commercial Brokerage and President of Gabhart Investments, Inc, a privately held real estate investment firm that manages a syndication of private investors, specializing in acquiring and renovating single and multi-family properties. He also serves on the Commercial Advisory Board at the University of San Diego Burnham-Moores Center for Real Estate and he teaches commercial real estate courses for the California Association of REALTORS® and San Diego Association of REALTORS®. He has been recognized by members of Congress, California State Senators, the City of San Diego, and had a day named after him in the County of San Diego for his community service and dedication to the community. He was awarded as the Dealmaker of the Year for 2015 in Retail and Multi-Family category.

How to Minimize the Risk of Owning An Apartment Building

How to Minimize the Risk of Owning An Apartment Building

A question was poised on the SDICA forum that I thought would be a good one to address.

The question was, “what steps can I take to minimize my risk of buying and owning an apartment buildings right now”?

Great question

Ask and you shall receive. Here is what I am doing to keep my properties operating effectively.

    1. Tenant retention
      • You’ve heard the old saying in business it’s easier to keep a client than to get a new one. Well, your tenants are your clients, and unless you’re grossly under-rented, you need to retain as high a percentage of possible of your current apartment tenants.
        • Keep a reminder in your calendar for 60 days before their lease expiration, so you can talk to them about renewing. If they are going to move, it’s best to find out as soon as possible. It’s helpful to find out why because sometimes you may be able to convince them to stay if its an issue that is rectifiable.
      • Have a Nicer Product or Better Rents (Or Both)
        • Tenant Improvements
        • Start by spending money on items that are unsafe or may cause emergency calls. These issues will happen, and if possible deal with them before it becomes a problem. Being proactive goes a long way. It also saves a lot of money and aggravation not to get calls at midnight.
        • When making improvements to the units, some of the best ways to get maximum bang for your buck is to:
          • Paint the unit – Two-tone color choices (wall color and white ceiling) are always a good idea. This will cost more initially, but once it is complete you will rarely ever have to paint the ceiling. You also want to paint the base, case, and doors a nice white color in semi-gloss. The more you can make the place feel like a home rather than an apartment the better rents and retention you will get.
          •  I like to make sure the texture looks well-done. It does not have to be perfect,  but you definitely do not want patches everywhere.
          • If you’re looking for a good painter, I highly recommend TruLine Painting. I’ve used them on all of my projects and they really do a great job of giving my units a quality facelift.
        • Update the interior doors & hardware
        • Flooring – I like to use as much tile and or laminate (the stuff that looks like wood) as possible. It costs a little more the first time but lasts 5 times as much as carpet and you will probably get about 5% more in rent.
    2. Get ahead of the game
      • If you have vacancies coming up get on it quick and return calls immediately.
    3. Track the market
      • Do rent surveys & talk to other apartment owners of similar buildings in the area where you own property (send me an email or drop a comment if you want to know how to do rent survey report & spreadsheet). This is also a great way of finding properties for sale. Make sure to give everyone you talk to your information and let them know that if they ever think about selling to give you a call.
    4. HAVE GOOD SYSTEMS IN PLACE
      • We automate as many of the processes as possible by having good checklists of activities we do repetitively. Instruction sets are created on each item to make sure that we do it correctly and consistently. It’s hard to figure out what is and is not working if you don’t do things consistently so you can track them. It makes it so much easier to improve on what we are doing. In addition, it allows me to easily hire people and get them up to speed quickly, or, if I lose someone, I know how to do that task and I am not held hostage or overly dependent on any one person.

Here is a quick example of sample turnover procedures.

  • Once someone gives us notice to vacate (sample of one of our move out inspection flow charts)

For example we have our systems for

        • Pre-marketing,
        • Final walk through (see sample flow chart of walk-through) letters go out to tenant with instructions on ours and their responsibilities.
      • Once it is vacant we will: walk through checklists for repairs, vendor coordination, property showing, applications etc.)
        • A few things we do to make it more efficient: Use an electronic Realtor (sentry) lock box. This device allows my assistant to generate up to 10 random codes daily from the office. When someone calls my google voice number, I get a text with the voice message which I forward to her which goes in our database. She then calls them back to get the rest of their contact info including an email. We then send the prospect an email with instructions on how to get to the property, how to enter, and THEIR OWN code which we inform them to not give out to anyone because it is tracked (see sample form letter below which we EMAIL to prospects). We are then able to log on to see who looked at the property so we can follow up to see if they are ready to fill out an application and why or why not. Also now that we have their email address, if they decide not to rent with us we now can update them in the future about upcoming vacancies 6 ,12,18,24  months from now when they may be thinking of moving again. This is crucial for renting out units fast.
        • Viewing instructions for our units

          • If they want to fill out an application, we  use my smart move/transunion credit/criminal check which they do online and either pay for or they give us the cashiers check and we then pay for (I like this way better because they are more committed after giving us the credit check fee) which we get a copy of along with the prospect. With this service, I do not have to collect social security codes and worry about certain compliance issues. In addition, it also speeds up the process. We then get an approve or disapprove based on our criteria and can then make a decision.
          • Once an application is accepted we send them an approval letter/email/phone call and let them know they will shortly receive a lease package via email for electronic signature using a service called docusign which is legally binding.
          • My assistant puts together the resident package which includes some of these items
            • lease agreement
            • resident welcome manual which spells out the rules in detail and what is expected from all parties
            • non smoking/drug addendum
            • maintenance addendum (look on blog for sample)
          • All of these are put into docusign for email/electronic email distribution. An email get’s sent out which is signed by both parties (legally binding) and no paper has to be printed. The fully executed copy goes in their file which is on our computer server for any reference in the future.

Hopefully this can give you some ideas on better ways to operate your apartments which will reduce your risk. As always feel free to give me a call or drop me an email to discuss further.

For the most updated information & news on real estate & Gabhart Investments go to our Facebook & Twitter pages


Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

 

CoStar San Diego Multifamily Real Estate Market Update 2018

CoStar San Diego Multifamily Real Estate Market Update 2018

CoStar San Diego Multifamily Real Estate Market Update 2018

On August 14th, CoStar Senior Market Analyst, Josh Ohl, came into Gabhart Investments to give a presentation on the state of the San Diego Multifamily Real Estate market. In this fast-paced presentation, Josh offered an in-depth overview of the future outlook of San Diego multifamily real estate, an economic forecast, where we are currently at in the market cycle, and much more. This blog post will give you an overview of all the topics discussed as well as many important graphs and charts designed to give you a comprehensive look at the San Diego Multifamily market. Let’s take a deeper look.


Main Take-Aways

  • The rental market is stable with occupancies hovering right around 94-95%. Rent growth year over year is at 4.5%.
  • The lack of housing – we’re simply not building enough to accommodate our city’s growth. San Diego needs 175,000 new units within the decade and is only on pace to build roughly 65,000.
  • The pillars of the economy are stable, even after Qualcomm laid off 1,300 employees over the last couple of months
  • The potential tearing up of NAFTA and what trade tariffs could do with Mexico may lead to issues. We currently do about $6 billion of trading with Mexico every year out of San Diego. Over 100,000 jobs in the region are tied to trade. This may impact the metro to some extent. Tariffs could also impact developers costs with imported materials.
  • We just finished the first half of 2018 with the strongest venture capital investment. $450 million of venture capital investment went into life sciences.
  • The navy is going to be stationing another 15,000 sailors here by 2025 – where they are going to live is a question we will have to answer as we already in a profound housing crisis (remember, they’ll be bringing their families too)
  • The lack of a San Diego Convention Center expansion could drive away Comic Con which just renewed their lease through 2021. That’s about $150million of economic impact.
  • Expansion – we’re into year 9 of expansion but it’s only a matter of time before the bubble does in fact burst.

November Ballot

  • Proposition 10 – Californian’s will be deciding whether or not to repeal Costa-Hawkins and enact the Affordable Housing Act (which would give local jurisdictions the right to pass rent control measures). If passed, this could be a disaster for the California and San Diego Economy.
  • Locally, National City Residents will be among the first city in San Diego County to decide on rent control. The National City Rent Control and Community Stabilization Ordinance will be decided on. The impact could be felt by both landlords and tenants as landlords will lose property rights and tenants will face tougher conditions when finding housing. If you’d like an official copy of the ordinance, let us know in the comments below.
  • What’s going to happen with Qualcomm Stadium? Are we going to put a San Diego State University expansion campus there or Soccer City? Or will we just be looking at the same old obsolete eyesore for years to come?
    • Likely it’ll be the last. Voters may not have time to be familiar on these very last-minute ballot efforts and spending tax dollars on a development isn’t always popular.

San Diego Apartment Fundamentals

apartment supply demand and vacancy in San Diego

  • It generally doesn’t matter what is built, there’s typically going to be a demand to fill those units.
  • Vacancies are flatlined at a steady 4%.
  • One trend we’re starting in San Diego is that occupancy is hovering right around 94-95%.
  • Lower vacancies are compelling people to stay in their apartments longer. The average resident stays for about 2 years.
  • Lower vacancies are also good for landlords. Renewal increases are strong at about 4-5% a year and when the tenant moves out, rents generally can be increased by about 10-15%. This is great, however, rent control may jeopardize many of these opportunities (more on this later).

San Diego Construction

San Diego Construction 2018

  • These numbers only reflect buildings that are actually being built. You may notice other sources indicate higher levels, however, those sources may factor in buildings that simply get a permit but never actually break ground.
  • Construction is picking up but it’s nowhere near enough to meet the growing demand.
  • Cost of lumber has gone up 20% since 2017 – this could mean higher construction costs.
  • Proposed tariffs could have an impact on developer’s proformas and smaller developers may feel the increases significantly.

Where They’re Building in San Diego

San Diego Heat Map Construction

  • About 25% of downtown’s inventory is currently under construction.
  • In Carmel Valley/Del Mar with One Paseo, about 10-12% of the current inventory is under construction.
  • Pockets of Mission Valley are seeing some construction with areas zoned for higher density residential.

 

San Diego Construction Cycle
San Diego Construction Cycle

  • One of the biggest trends that we have observed during the last cycle compared to this cycle is the change in floorplans.
  • San Diego is one of the largest metros in the US where floor plans have shrunk.
  • We’re building a lot more studios and one bedroom apartments. This is because developers can build and charge more for these units in areas like Little Italy, East Village, etc…
  • This could also mean rent per square foot is increasing and people are waiting longer to get married/start families so there’s less demand for larger spaces.

San Diego Rent Growth

San Diego Rent Growth

  • San Diego ended the second quarter of 2018 with year over year rent growth of 4.5%. Among major metros in the US, San Diego is in the top 10.
  • We’re into year 9 of rent expansion
  • The average rent in San Diego is approximately $1800.
  • CoStar anticipates positive rent growth over next few years.
  • This could be drastically different this time next year if Proposition 10 is passed on the November ballot. This would repeal the Costa-Hawkins Rental Housing Act and allow for cities to pass their own rent control ordinances. Don’t believe it’ll happen? In November, National City will be the first city in San Diego County to decide on rent control. This has the potential to harm landlords and renters.

San Diego Rent Control Lunch & Learn

San Diego Rent Control Class Gabhart Investments

I’ll be hosting an informative lunch and learn on Tuesday, September 18th, where you can learn more about Proposition 10 and the impact rent control may have on San Diego. This will have a strong emphasis on the san diego multifamily market, however, all property types will be discussed. I strongly encourage you to attend this informative event. Free lunch is provided to those who RSVP.

Sign Up Here

San Diego Annual Rent Growth by Submarket

  • Rent growth is the strongest in Point Loma at 10%.
  • Areas like East County, UTC and Downtown are seeing high rent growth.
  • The coastal markets are reaping the benefits of the increased demand during the summer months.
  • The San Diego rental market is seeing unprecedented rent growth and health.

san diego rent growth vs income growth

  • Incomes are not growing as fast as rents are growing, this is leading many San Diegan’s to downsize or share units.
  • This trend has continued for the past 7-8 years and probably will for many years to come.
  • Median renters household income is about $48,000
    • 42% of income is going towards rents
    • Downtown renters are paying 50% or more in some cases
  • Historically as rents continue to grow, people will look towards home ownership.
  • People are staying in their starter homes for about 9-10 years (up from the US average of 5-6 years)

San Diego Housing Crisis

San Diego Housing Growth

San Diego Single Family Housing Growth

  • Historically San Diego has been building more single-family residences (SFR) than multifamily units, however, these trends are starting to change. We’re actually building more apartments now.
    • this could be due to a lack of land or simply demand changes.
  • The San Diego Housing Commision estimates in the next decade based on population growth, we need about 175,000 additional units of supply.
    • This equates to roughly 17,000 units each year.
    • San Diego is FAR behind these numbers and is experiencing a housing crisis.
    • Roughly 3,000-3,500 multifamily units are being added each year.
    • Single-family permits are only averaging about 2,000 a year.
    • This places us about 12,000 or so units behind each year.

San Diego Capital Markets

san diego real estate sales volume

  • The San Diego multifamily market is having a really strong run as of late. Peak sales volume in 2017 was led by areas like Mission Valley which had $900 million in total sales volume. This is attributed to large deals like Pacific Ridge.

San Diego Sales Volume and Pricing

  • Last year we hit peak price at $270k a door and this year in the 1st half of 2018 we’re down to $255k. This isn’t a major cause for concern but should be something to watch for.
  • Newer construction on average is ranging between $400,000-450,000 a door with exceptions like The Dylan in Point Loma where prices were at about $500,000 a door.

san diego real estate quarterly sales volume

  • The total number of transaction is down 30% in the first half of 2018 compared to the first half of 2017
    • Fewer people chasing deals and banks looking at higher LTVs up to 50%
    • Institutional investors may be in hold periods
  • In the first half of 2018, we’ve only had 2 deals go over $100 million.

san diego cap rates by property type

  • Industrial properties are leading the way with the highest cap rates, followed by office, retail, and multifamily.
  • Along the coast, we’re seeing deals close at insanely low cap rates of 1.5-2.5%.
  • Many of the 5-5.5% cap rates in areas like National City, Chula Vista, La Mesa, North County, etc… are no longer around.
  • CoStar does not anticipate much cap rate expansion – maybe .3%
  • Our two favorite property types are multifamily and industrial. An ideal strategy may be for someone to move out of a lower cap rate multi-family property that could possibly fall under rent control in the future and move to a higher cap rate industrial building.

San Diego Demographics

San Diego Population Growth

  • People with graduate degrees are coming to San Diego. Our tech and life sciences industries have driven significant growth.
  • Those with a high school education are moving out due to a lack of wages that can meet the increased cost of living in San Diego.
  • Population growth has fallen below the national scale. This is due to San Diego’s transient town mentality where residents do not typically stay for more than a few years. The transient mentality can be attributed to several factors including the higher cost of living, decreasing housing stock, environmental factors, etc…
  • International migration has been the driver of our population growth. This can be attributed to factors like our growing life sciences and tech industries among other things.

San Diego Migration Statistics

  • Many San Diegan’s are beginning to migrate to more affordable markets like Phoenix, Texas, and the Inland Empire. From 2012-2016, 42,000 people migrated to the Inland Empire alone. If this trend continues, San Diego may lose out on a lot of talented workers.
  • Lack of job growth is leading some to pursue jobs in more thriving locations like the Bay Area.

San Diego delayed life changes demographics

  • Increasingly San Diegan’s are waiting longer to get married. From 2000-2015 the average age to get married went up by approximately 5 years.
  • This means the demand for more smaller units such as studios and one bedroom have increased and the demand for single-family homes has declined.

San Diego income growth

  • San Diegan’s income growth is lagging far behind the increased cost of living. We’ve only seen about 2-3% increases this cycle. If this trend continues, many working-class San Diegan’s could face financial hardships as they try to afford the increased cost of living.

San Diego Employment

San Diego employment

  • San Diego is currently above the national average for employment.
  • We hire about 20,000 workers year over year in San Diego.

Biggest Impact – Qualcomm

  • In April, Qualcomm laid off 1,300 employees. They gave back approximately 300,000 sq ft of office space.
  • The impact on the San Diego metro area is estimated at $5 billion. This accounts for 4% of the San Diego GDP.
  • For every job Qualcomm creates, another 2.5 jobs are added to the region on average.

Downtown San Diego Submarket

Downtown San Diego Submarket

  • 25% of downtown’s market is under construction.
  • No new supply in 2016 allowed for the increase in demand on newer constructions.
  • Downtown San Diego is one of the only places where vacancies are going up. This has to do with how
    many units are being built there compared to demand.
  • 60% of the units coming online this year in San Diego will be in Downtown.

Downtown San Diego Pipeline

Downtown San Diego Pipeline

  • The downtown market lacks a strong live, work, play environment. The lack of a Chargers stadium really hurt the area. Most buildings only consist of ground floor retail. There are very few places in San Diego where you can walk out of your 5-star class-A building and walk into a large homeless population (East Village is one of those places)
  • It remains to be seen how much demand will be driven to these units in the coming years.
  • As you can see, there is plenty of proposed buildings that may come online in the next decade. It will be interesting to see how this develops.

San Diego Trolley Expansion

San Diego trolley

  • San Diego is banking on the fact that people will start using the trolley with the expansion into the UTC area. There are approximately 112,000 riders a day but that number is only a small dent in the overall commuting population.
  • We are a largely suburban office campus market. People like their cars and there are very few places to get to without a car in San Diego.
  • It will be interesting to see what the trolley expansion will have on areas like Downtown San Diego.
  • The UTC stop has 2 million sq ft of office space within half a mile of it. This is great, however, the question becomes, “who’s going to want to walk half a mile in a suit in 90-degree heat”? Or what about those who simply have driven their whole life and don’t see the point in taking the trolley?
  • The trolley will be vital to continued development growth, but it remains to be seen if San Diegan’s will ever adopt it in large numbers.

** All graphics used in this article were provided by Josh Ohl, a Senior Analyst at CoStar. CoStar Group is the leading provider of commercial real estate information, analytics, and online marketplaces. They have been a tremendous tool for myself and countless other real estate professionals. Please visit their website and get in touch with your local representative today. **


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