Sonoma, Napa, Solano multifamily real estate investments benefit from suburb migration

Most of us in the apartment industry, like most other industries, have been wondering if things were ever going to get better. Looking out in March 2022, there are some positive signs on the horizon.

First, there’s a feeling in Sonoma County that the four-year-long legal limitation on rent increases that was triggered by the Tubbs Fire in 2017 has expired. What does that mean?

Assuming the district attorney’s office agrees that rental property owners have more than paid their dues and endured four years with limited ability to recoup rising costs, they can now follow the language of the statewide rent control bill passed in 2019, which limits annual rent increases to 5% plus area consumer price index.

Next, among the many trends that were revealed during the Great Pandemic, we discovered that housing is in high demand. In the last year alone, we saw single-family home prices rise by over 10%.

For that matter, gas prices, food prices, construction materials, electronics, automobiles — everything rose more than the 10% that rental housing was allowed between October 2017 and December 2021. Driven by a stronger job market, the demand for rental housing rose too . Sonoma County unemployment dropped from 6.6% in December 2020 to 3.5% as of December 2021.

Let’s take a look at how the industry fared in terms of rental demand, sales and new construction.

trends

The “work from home” trend was one of the clearest emerging from the pandemic, and that has translated to strong demand for all housing.

Not surprisingly, the highest demand in the rental universe is for larger units. Now two years down the road from the initial lockdown, some things have changed, and some remain the same.

Overall demand rose almost instantly as renters fled dense housing closer to the cities of Oakland and San Francisco and the wave reached through Marin County to Sonoma County. Over time, some renters have moved back to the cities and denser population centers, but many remain in Sonoma and Marin counties.

Let’s talk briefly about stimulus rent payments to households impacted by COVID. While rent collections of occupied units has been in the 95%-plus range, the payments to property owners under the CTRA Act have lagged with many owners still waiting for tens of thousands of dollars from the agencies charged with handling the disbursement of these funds.

Rental pricing, vacancy and sales rebound

In contrast to 2020, last year was a comeback year. The average rent for a new occupant of the same unit type rose by 5% in Sonoma County. Our survey of 12,391 units showed a drop in vacancy from 3.3% in spring 2021 to 1.8% in fall 2021.

Transaction volume for 10-plus-unit properties reached a low point in 2020, with eight transactions totaling $67 million. Capitalization rates averaged 5.16%, and prices per unit averaged $238,000. Rebounding in 2021, we had 15 sales (10-plus units) totaling $343 million.

New construction and road ahead

Our most recent data shows completion of 550-plus units in Sonoma County in 2020-2021, with another 600-plus under construction to be completed in 2022. Several hundred more are in the pipeline as Sonoma County pushes to address the housing deficit.

Looking forward

In 2022, expect apartment rents to grow at a moderate pace as the economy continues to improve. Vacancy will remain in the 2%-3% range as demand remains strong. A traditional challenge, residents purchasing homes may slow with expected interest rate increases in 2022.

Investment appetites for apartments are expected to remain robust, and cap rate movement will likely mirror the long-term interest rate curve.

Solano County

The Solano County apartment vacancy rate now measures 3.5% and continues to register around all-time lows and well below the 10-year historical average of 4.7%, according to CoStar.

Strong demand in 2021 followed the highest level of positive absorption recorded in the market in 2020.

Similar to Sonoma and Marin counties, remote working spurred on by social distancing and societal restrictions to stem the pandemic allowed many Bay Area renters to look to new geographies to meet housing needs. Population flow out of urban centers to more suburban and secondary markets was a trend seen nationally and one that played out to the benefit of the Vallejo–Fairfield metropolitan area.

Outside of purely spillover demand from more cost-sensitive renters looking to Vallejo-Fairfield for affordability, the metro has demand drivers located within its borders that help solidify the metro’s apartment market.

The US government is a major employer in the metro, as the Travis Air Force Base in Fairfield employs more than 14,000 military members and civilian employees.

Rent growth has been correspondingly strong due to both internal and external (COVID-driven) demand, with year-over-year growth now measuring 8.5%. Again, lit was ed by demand for larger units with extra space for offices in two- and three-bedroom units.

Sales continue to be sluggish with 22 sales for Vallejo–Fairfield and average cap rates in the 5% range for 10-plus unit properties.

Napa County

Apartment rents in the Napa Valley market have posted an average annual gain of 4.6% over the past three years, according to CoStar. While 490 units have delivered over the past three years (a cumulative inventory expansion of 9.7%), nothing is currently underground. Vacancy is 3.1%, down from a high in 2021 of over 8% with a historical average of 4.8%

The Napa–American Canyon market saw four sales of complexes with over 10 units in 2021. Average cap rates were in the 4.25% range.

Scott Gerber (415-927-8888, scottgerber.com) is president of NorCal Commercial, a multifamily investment real estate brokerage based in Petaluma.