In the Wild, Wild West of the apartment market in the East Bay, what are the opportunities for making a profit?
Apartment Sellers are taking advantage of the incredible demand, especially in Oakland. In the first four months of 2017, 5 and over apartment buildings that sold priced over $1,000,0000), 8 buildings that sold were on-market listings, 15 were off-market deals. On or off market, apartment buildings are selling at record high prices. There are agents out there that are bringing off-market properties to potential Buyers and telling the Buyers they will need to pay the procuring Broker a commission because Sellers do not want to pay a commission. Such is the demand for apartments in Oakland!
Experienced property owners are waiting on the sideline for the next market turn. Many invested during the last downturn are pleased with properties they bought at a deep discount. Some have refinanced at favorable rates and are sitting on cash waiting for the right opportunity. Long time owners are also reaping the rewards of prudent management that enabled them to retain ownership during the foreclosure crisis. The results of more stringent rent control and increased cost are affecting them less than newer owners that have paid between a 3 and 4 CAP rate.
Small apartment flippers have carved out a profitable share of the market. Contractors who can find rundown buildings in desirable neighborhoods are adding high-end finishes. I represented a Buyer (coming out of an exchange) who paid all cash for a renovated duplex in North Oakland. The Seller had paid $750,000 for the duplex which he sold 6 months later for $1,100,000. Even taking into consideration the foundation-up renovation, there was a considerable profit for the developer and the Buyer was happy to get a turnkey property that will provide a modest return.
Another active segment of the market is the repurposing of existing buildings. In one such development where I am representing Buyers, the Sellers spent 5 years getting neighborhood approvals to convert a boarded up retirement home into 49 residential units. The Sellers are selling at a profit, and the Buyers are taking advantage of a project that is shovel-ready.
Vacant land is also attracting investors. In the last several years Investors have been buying vacant land and going through the entitlement process, either selling the entitled property or developing the projects themselves. 3020 San Pablo in Berkeley, a 9,000 sq. ft. commercial lot, sold in 2015 for $1,500,000. It sold in 2016, entitled for 29 units, for $2,900,000. A 6,000 sq. ft. lot in Jack London Square purchased in 2015 (by one of my clients) has been entitled for 20 luxury condominiums and the developer is ready to start construction this summer.
Depending on which statistics you read, there are between 2700 and 3000 units currently under construction in Oakland, and another 7,000 to 12,000 in units various stages of development. Will these extra units depress rents in Oakland? While rents seem to be leveling out after a 60% increase in the last several years, there are reasons to think that there will not be a substantial downturn. To start with, all the new apartments coming on the market will either be at the high end of the rental market or some type of subsidized housing. Neither of those two categories will be in direct competition with the existing apartments. Units that have been controlled by various rent control ordinances will continue to go up to market rate upon turnover, which will generate tremendous increases for their owners.
The other dynamic is continued job growth in the East Bay. 12,000 new jobs were created in the first quarter of 2017 alone. With continued job growth, the East Bay will still be short of adequate housing for some time to come. That in turn should keep rental units full at good rates in the foreseeable future, providing a good return for various kinks of investors.