Valley rental rates fall as vacancies rise

Rents are down and vacancies are up at apartments throughout the Northern San Joaquin Valley.

Stanislaus County apartment rents dropped nearly 5 percent during the past year to an average $780 per month, making this one of California's cheapest rental markets.

That may make renters happy, but it's causing apartment complex values to crumble.

Example: Modesto's Pinegrove Apartments on Warren Way sold for $4.2 million in 2005, but it was bought for $2.38 million last month. That's a 43 percent decline in value.

"The market has significantly corrected," said Jon Holmquist, a vice president at Marcus & Millichap commercial realty, who brokered the Pinegrove deal after the property was

foreclosed on by lenders. Pinegrove was listed for $3.1 million in the fall, and five buyers made bids.

"There's certainly money out there to buy apartments, but the deal must make sense," Holmquist said. "Today's buyers are very savvy. They're educated, sophisticated investors who are basing their deals on realistic, current and feasible financial yields."

That's a big switch from 2005 when "buyers and underwriters based their decisions on best-case scenarios," Holmquist said.

The current rental scenario is not rosy for landlords.

RealFacts, a consulting group that gathers rental rate and occupancy data, found that apartment rents throughout the nation were "bludgeoned" by the weak economy during October, November and December.

Nationwide, rents fell 6.1 percent to an average $994 per month. California rents fell 6.8 percent to $1,337.

RealFacts acknowledges those averages are just asking prices, not the money collected, considering "move-in specials." To lure tenants, it estimated 60 percent of landlords nationwide offer sweet deals.

More rental homes, fewer tenants

Such enticements are evident throughout Stanislaus. Prospective tenants who flip through The Modesto Bee classified ads can find numerous "one month free," "$1,000 off move in" and "free 32-inch LCD TV" apartment specials.

Apartments now must compete with thousands of bargain-priced rental homes, which investors scooped up after foreclosures. Landlords also are competing for fewer and fewer tenants, as Stanislaus's 17.2 percent unemployment rate has convinced many renters to leave the region.

RealFacts calculated Stanislaus' apartment occupancy rate at 91.7 percent. But it's actually far less when the impact of special deals are factored in, according to John Citrigno, an industry consultant and real estate broker who has been active in the Central Valley apartment market since 1986.

Citrigno said the "collected rents" equal about an 85 percent occupancy rate in Stanislaus' nicer apartment complexes and 70 percent to 75 percent occupancy in the "poorly managed, less well-located properties."

At Pinegrove before the sale, about half of the 57 units were rented, Holmquist said. Stanislaus' "persistent high vacancy" rates, he said, contributed to the low sales price.

Pinegrove sold for $63 per square foot, even though its estimated replacement cost would be $82 per square foot.

Despite such discounted prices, far fewer buyers are interested in apartment complexes these days, said Duke Leffler, president of PMZ Commercial in Modesto.

"Five years ago, if you listed an apartment for sale, you knew you were going to get an offer. That's no longer the case," Leffler said.

Even though some apartment deals can generate a 9 percent annual return on investment, he said, it's hard for buyers to come up with cash to buy.

He predicted the apartment market will not recover for "several more years because right now there is too much confusion."

Contributing to the confusion are apartment owners who think their complexes are worth more than they are, said Citrigno. Many Stanislaus apartment owners want to sell, he said, but that would require reducing prices closer to what was paid for Pinegrove.

Pinegrove has 57 units, so it sold for $41,1754 per unit. Compare that with another Modesto complex for sale, Granger Villa Apartments, which has an asking price of $107,917 per unit.

Part of the pricing problem, Citrigno said, is that those who purchased apartments during the past decade "have little or no equity" left, and many owe more than their complexes are worth.

Those who purchased apartments decades ago still may have equity, but they "were spoiled by the peak pricing of a few years ago, and refuse to come to the market to sell now," Citrigno said.

Because of that, he predicts, "there will be very few sales of apartment properties over the next two to five years."

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

This story was originally published January 21, 2010 at 9:47 PM with the headline "Valley rental rates fall as vacancies rise."