The Sonoma County Income Property Report Q2 2022

THE SONOMA COUNTY INCOME PROPERTY REPORT Q2 2022 Hello Friends, We hope this report finds you and yours well. If this is the first time you have received our newsletter, this report aims to provide rental and sales trend information to Sonoma County income property owners. We all have unique financial goals and need to make our decisions armed with the best information available.

MARKET ASKING RENT PER SF BY BEDROOM Santa Rosa - Sonoma - Petaluma - Windsor - Rohnert Park - Sebastopol - Healdsburg | Effective Rents Source- Costar

RENTAL MARKET

The average Sonoma County (Santa Rosa - Sonoma - Petaluma Windsor - Rohnert Park - Sebastopol - Healdsburg) rent for apartments for the 1st quarter of 2022 was $1,887, with an effective rent per sq. ft. of $2.26. This represents a year-overyear rent increase of 5.18% and a 4.77% increase from the 1st quarter of 2022. The occupancy factor for the 2nd quarter of 2022 was 97.78%, which was virtually unchanged from the prior quarter. Presently, the 3rd quarter to date shows an average rent of $2,114 and an average occupancy factor of 97.39%.

As reported in our prior report, Sonoma County rents have been steadily increasing since the beginning of the pandemic. Much of the growth has been due in part to an increased migration from San Francisco, East Bay and South Bay cities. Additionally, inflation and rising interest rates are keeping many first time home buyers priced out of the sales market. Since interest rates are not expected to significantly decline any time soon, it is likely that vacancy factors will remain low, while rental values continue to remain strong throughout the rest of 2022.

SONOMA COUNTY EFFECTIVE RENTS ** PERIOD

STUDIO

1 BED

2 BED

3 BED

The average price per unit (PPU) for the 2nd quarter was $366,770, which is down -2.51% from the 1st quarter of 2022, which recorded an average PPU of $376,217.

The average days on the market (DOM) for 2-4 units in the 2nd quarter of 2022 was 35. This represents a -46.97% decrease from the same quarter of 2021. This is indicative of very strong buyer demand, as well-priced income-producing units are being absorbed at a faster rate than we have seen in recent years.

CURRENT SNAPSHOT

As of this date, there are 32, 2–4 unit properties listed for sale in Sonoma County. 11 of these properties are presently under contract. The average list price for the properties not under contract is $1,105,329, while the average list price for properties under contract is $1,056,000. The average price per unit (PPU) for the properties not under contract is $388,771, with an average days on the market of 54. The average price per unit for the properties in escrow is $422,101 with an average DOM of 45.

3RD QUARTER SNAPSHOT

Santa Rosa, Sonoma, Petaluma, Windsor, Rohnert Park CoStar projections highlighted.

Source - BAREIS MLS

2-4 UNITS SALES

The average sales price for the 2nd quarter of 2022 was $927,940.

This represents a -2.64% decrease from the 4th quarter of 2021 and a -5.06% year-over-year decrease from the 2nd quarter of 2022.

As discussed, the average sales price during the 2nd Quarter of 2022 was $927,940, while the average list price for properties under contract is presently $1,056,000. If this differential holds true, we will likely see a quarter-over-quarter increase of up to 13.8% by the end of the 3rd quarter of 2022. Quarter-over-quarter numbers can be deceiving because we are dealing with relatively low inventory, so it is important to not read too much into this projected increase. Our experience on the ground is that there is high demand for well maintained units with near market rents,

while properties with deferred maintenance and/or sub-market rents are being passed over.

While it is clear that increased interest rates have sidelined many investors seeking a fair return on their investment, the market appears to have accepted the rate increases without too much detriment to property values. Some lenders are offering buyers a one-time refinance in the event that interest rates decline in the next year. This is providing peace of mind to some investors who are being quoted up to 7% for non owner-occupied loans, when the same loan was sub 3% not too long ago. Additionally, we are seeing more investors opt for 5 to 7 year arms, with the intention of locking in a 30 year fixed if and when interest rates decline to more attractive levels. While this may be a good strategy for some, it is not without risk if market conditions are not favorable when the loans come due.

2-4 UNITS SALES

quarter of 2021 and a 7.13% quarter-over-quarter. The average DOM for these sales was 66, representing a -91.85% decrease from the same quarter in 2021. Yes, properties last year during this time had an average DOM of 810 days. The average cap rate for the properties sold during the 2nd quarter was 4.5% on current rents.

At the time of this report, there are 10, 5+ unit buildings listed for sale in Sonoma County. Four of these properties are under contract, with an average days on the market of 150. The average list price of the properties under contract is $1,837,500 which represents $306,632 per unit. The average list price for the properties not under contract is $4,021,133, which represents $296,194 per unit. The average days on the market for the properties not under contract is 106.

MARKET CAP RATE BY STAR BY RATING Source- Costar

5+ UNITS SALES

2-4 UNITS AVERAGE FOR SALE VS. SOLD PRICE Source - BAREIS MLS

CURRENT SNAPSHOT

5+ UNITS SALES

There were 12, 5+ unit properties sold in Sonoma County during the 2nd quarter of 2022. The average sales price was $6,101,250, with an average price per unit of $232,429. This represents a year-over-year price per unit decrease of -11.07% from the 1st

At the time of this report, there are 10, 5+ unit buildings listed for sale in Sonoma County. Four of these properties are under contract, with an average days on the market of 150. The average list price of the properties under contract is $1,837,500 which represents $306,632 per unit. The average list price for the properties not under contract is $4,021,133, which represents $296,194 per unit. The average days on the market for the properties not under contract is 106.

We are starting to see more and more investors exit the equities market in favor of real assets in the 5+ unit segment of the market. Multifamily real estate is a need-driven asset, and is often considered a hedge against inflation.

As many potential buyers have been priced out of the residential purchase market due to increased interest rates and high prices, there is increasing demand for rental housing in a market with little inventory. At a time when many investors are seeing their stock portfolios steadily declining, multi-unit real estate is perceived to be a safe investment to protect assets, even if short term appreciation is not a significant consideration.

Despite the statewide and local rent control restrictions, short supply and high rental demand will usually favor landlords and provide for a stable investment.

While cash flow may be diminished for leveraged investors, rising inflation and a declining equities market is providing enough incentive for many investors to continue to make multiunit purchases. As a result, the multi-unit segment of the market is not currently experiencing the same “cooling off” that the residential market is experiencing. Prime properties are especially desirable at this time, as many investors are not interested in pursuing costly repairs due to rising labor and material costs. Additionally, properties listed with an attractive actual cap rate and market rents are selling with higher demand, since statewide and local rent control restrictions continue to make it difficult for landlords to catch up to market rents.

EXPERTISE AND MARKETING MATTERS

As we always say: knowledge is power. If you do not have the time or will to educate yourself on the fine points of rent control, COVID-19, and other landlord-related legislation, it is essential to surround yourself with the very best professionals in their respective fields who can help you navigate through these challenging times. There are a handful of professionals that we trust implicitly and we are always happy to offer a referral.

If you are considering selling, the right plan coupled with the very best marketing campaign matters more now than at any time in a decade. While there are many unknowns, we do know that change is inevitable. Sales and purchases will continue, and making good decisions is the key to thriving in changing markets.

California will continue to be appealing to many investors seeking a fair return and a stable asset, regardless of the current state of affairs.

Here are a few questions you should ask yourself prior to selecting an agent: 1. Is the agent local and do they have vast experience in this segment of the market? Ask to see a 5-year production report for properties like yours. Make sure that these numbers reflect their production only, not the office. Ask the agent to detail their experience during the last financial crisis to find out how they will help you navigate this market. Lastly, ask where he/she resides.

2. Does the agent have an understanding of the market? Ask a few pointed questions which you already know the answer to.

Ask about current cap rates for comparable properties, rental and sales trends, price per unit, and price per foot of comparable properties. How do your rents compare to market rents? Ask to see some current comps.

3. How will he/she present your property in its best light? In a market where many buyers have more knowledge than real estate agents, it is important to know how your agent will answer buyer objections. Do a little role-playing and see how he/she answers your tough questions and matters of negotiation. How will the agent navigate tenant’s rights during the marketing and sale?

4. Ask to see detailed examples of marketing packages. During normal markets, just listing on the MLS and hoping for a great offer is not enough. Find out exactly how he/she is going to safely and virtually market the property, and make sure to ask to see examples of offering memorandums with pro forma income and expense statements.

5. Is the agent just trying to make a commission, or does he/she truly have your back, even if it is against their own financial interests? If you ask items 1-4, you will likely get to this answer.

OUR LISTINGS

COMING SOON 4 UNITS PRICE: $1,275,000 BUILDING 3,674 SQFT 12,370 SQFT LOT 184 Golden Ridge Ave, Santa Rosa, CA 95472

IN ESCROW 4 UNITS PRICE: $1,250,000 BUILDING 2,996 SQFT 6,960 SQFT LOT

2837 Apple Valley Ln, Santa Rosa, CA 95403

IN ESCROW 7 UNITS

AVAILABLE 4 UNITS

PRICE: $1,500,000 BUILDING 3,589 SQFT 1.25 ACRE LOT

PRICE: $1,500,000 BUILDING 2,597 SQFT 4,950 SQFT LOT

6372 Old Redwood Hwy, Santa Rosa, CA 95403

888 Petaluma Blvd S, Petaluma CA 94952

THE SONOMA COUNTY INCOME PROPERTY REPORT Q2 2022