Friday, Feb. 15, 2008

Housing slump taking toll on rentals

Landlords fight to keep units filled, rents stable

Rents are flat, sales are scarce and values are way down for apartment complexes and rental properties throughout the Northern San Joaquin Valley, landlords were told Wednesday at a Modesto luncheon.

The California Apartment Association's economic forecast event told landlords what most of them already knew: The housing market slump is hurting rental housing.

"We went into the (real estate decline) first and deeper than other places, but we're probably going to get out of it faster," predicted John Citrigno, who specializes in multi-family housing sales for Coldwell Banker Commercial. He said housing downturns typically last three years, so the valley "probably only has two years of it left to go."

That's good, he said, because rental properties are struggling to keep units filled and rents stable.

Citrigno, who surveyed the region's apartment complexes, calculated the average rent is stuck at $814 a month in Modesto, $827 in Turlock, $776 in Atwater and $723 in Merced.

While the complexes are about 92 percent to 95 percent occupied, Citrigno said the "economic occupancy" is only about 85 percent because owners must provide large rent concessions to attract tenants. He said most offer at least half off the first month's rent, or sometimes provide the first month free.

Citrigno said "historically unprecedented" competition from single-family rental homes is holding down apartment rents.

Single-family home rents also have dropped. Citrigno said typical three-bedroom home rents in Stanislaus County two years ago were $1,200 to $1,500 per month. Now they're $900 to $1,200 per month.

Rental rates for many duplexes, fourplexes and other small multifamily units also have declined, according to Gary Kirkpatrick, an investment property specialist for Prudential Commercial Real Estate in Modesto.

Kirkpatrick said small complexes report having more vacancies, fewer qualified applicants and falling property values.

"Those who bought in 2005 and 2006 are all upside-down (with expenses exceeding revenues), and they can't sell their properties for what they paid for them," Kirkpatrick said.

That wasn't the case in 2005 when 163 duplexes sold for an average of $375,529 in Stanislaus County. Last year, only 51 sold for an average of $338,000. Even though 2007 prices were lower, Kirkpatrick said, it took nearly three times longer to find a buyer. Currently, about 232 duplexes are for sale.

Kirkpatrick offered this example to demonstrate the market shift: A duplex on Gemini Court in Modesto resold four times in three years. It sold for $159,000 in 2002, $218,000 in 2003, $316,000 in 2004 and $400,000 in 2005. He estimated the current owner, however, is losing about $11,274 a year.

Another property that soared in value during the real estate boom years was a 12-unit complex on East Granger Avenue in Modesto. Kirkpatrick said it sold for $490,000 in 2002, $890,000 in 2004 and $1.2 million in 2006. That final buyer paid $100,000 per unit.

That's far more per unit than what most complexes sold for in 2007. Citrigno said only nine larger complexes sold last year in Stanislaus, San Joaquin and Merced counties, and they averaged about $81,000 per unit.

Some sold for far less.

Oak Terrace Apartments, a 64-unit north Merced complex, sold in 2001 for $1.88 million. Citrigno said it reached a peak value of $4.75 million by 2005. It was listed for sale in 2006 for $4.5 million, but its price was lowered several times before selling to the Merced Housing Authority in 2007 for $3.6 million. That's $56,250 per unit.

Citrigno said some Merced apartments can be purchased for $45,000 per unit. He said that's a bargain because building com- parable units would cost more than twice as much.

Nevertheless, some new luxury apartments are being built in the region.

Villas at Villagio, a 240-unit complex at Floyd and Roselle avenues in Modesto, is expected to open this spring, Citrigno said. He said the 707- to 1,231-square-foot units will be priced about $950 to $1,300 per month.

Bee staff writer J.N. Sbranti can be reached at jnsbranti@modbee.com or 578-2196.