The Sonoma County Income Property Report Q4 2023

THE SONOMA COUNTY INCOME PROPERTY REPORT Q4 2023 Hello Friends, Happy 2024! We hope this newsletter finds you and your family in a state of peace and good health as we begin the new year. 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 it is important that we equip ourselves with the most accurate and reliable information available. By doing so, we increase our chances of making sound financial decisions.

SANTA ROSA - SONOMA - PETALUMA - WINDSOR ROHNERT PARK | EFFECTIVE RENTS

RENTAL MARKET The average Sonoma County (Petaluma - Windsor Rohnert Park - Sebastopol - Healdsburg) rent for apartments for the 4th quarter of 2023 was $1,879, with an effective rent per sq. ft. of $2.30. This represents a year-over-year decrease of -.42% and a -1.52% decrease from the 3rd quarter of 2023. The occupancy factor for the 4th quarter of 2023 was 94.74%. Presently, the 1st quarter to date shows an average rent of $1,872 and an average occupancy factor of 94.75%.

As expected, rental prices have remained steady throughout the year in Sonoma County. Nevertheless, due to elevated interest rates and persistent inflation, a significant number of renters have found themselves excluded from the housing market, opting to continue renting. Acknowledging the fragility of the rental market and aiming to prevent extended vacancies, numerous property owners have chosen not to raise rents, which is a shift from the consistent increases observed in recent years. This strategy is designed to maintain tenant satisfaction and retention, while avoiding prolonged vacancies. Concurrently, tenants, aware of the considerable expenses linked to relocation, have largely opted to remain in their current residences.

NEW CONSTRUCTION UPDATE In the year 2023, Sonoma County witnessed the delivery of approximately 780 units, signifying a noteworthy milestone. New projects broke ground, contributing to a construction activity peak not seen in the past two decades.

**Please note that the numbers may vary slightly, as Costar’s data is updated constantly.

MARKET ASKING RENT PER SF BY BEDROOM

Source- Costar

As per CoStar, the standout delivery of 2023 was the inauguration of the Brix325 apartment complex in Santa Rosa, boasting 248 units. Officially opened in February, this project exclusively offers market-rate units, featuring both one and two-bedroom residences. The demand for these units has remained robust, with nearly 50% of them leased within just a few months post-completion.

Cloverdale is currently home to the area's largest apartment construction project. Baumgardner Ranch at 18196 Highway 101 is a 300-unit complex, featuring 4-star garden-style units, and is poised to offer one, two, and three-bedroom residences, with completion expected in late 2024.

The demand for these new housing options has been quite positive, alleviating some concerns about potential oversupply in the market. Sonoma County continues to attract renters seeking to escape the urban environment of the Bay Area, with many of them specifically searching for more affordable living, low crime rates, and the appealing charm of Suburban living.

2-4 AVERAGE SALES PRICE

2-4 UNITS SALES The average sales price for the 4th quarter of 2023 was $885,964. This represents a -10.63% decrease from the period ending 3Q of 2023. The average sales price for the 12-month period ending 4Q 2023 was $962,986, which represents a negligible 1.07% increase over the prior year.

It is noteworthy that 14 of the 22 sales occurred in the months of October and November, historically considered a slow time of the year. Despite the record high interest rates during this period, buyers found the "discounts" from motivated sellers too irresistible to pass up.

The average price per unit (PPU) for the 4th Quarter was $357,793, which is down -15.52% from the 3rd Quarter of 2023, which recorded an average PPU of $418,588. The average price per unit for 2023 was $377,994 which is down -0.81% from 2022, which recorded an average PPU of $381,110.

The average days on the market (DOM) for 2-4 units in the 3rd Quarter of 2023 was 50, with 22 properties sold.

This represents a -54% decrease in marketing time from the prior Quarter and a -9% decrease from the same Quarter of 2023.

CURRENT SNAPSHOT As of this date, there are 27, 2–4 unit properties listed for sale in Sonoma County, 8 of which are under contract.

The average list price for the properties not under contract is $1,410,576, while the average list price for properties under contract is $775,375.

As discussed, the average sales price during the 4th Quarter of 2023 was $885,964, while the average list price for properties under contract is presently $775,375. On average, the list-to-sale price differential has been 1-2% since we have been tracking this data. If this differential continues to hold true, we will likely see a Quarter-overQuarter decrease of up to -12% by the end of the 1st Quarter of 2024. While this projection seems ominous, we prefer to focus on the year over year numbers due to relatively low quarterly volume.

2-4 UNITS SALES

5+ UNITS SALES As is our usual practice, we refrain from analyzing the sales trend data for properties with 5 or more units due to the low volume and significant variance in the types of properties sold, especially for the larger apartments.

Rather than focusing on the sales trend data, we find it more useful to monitor the average price per unit and cap rates, as they provide the most predictable metrics.

The 4th Quarter brought 8 sales, with an average days on the market of 138. The average cap rate was 5.4%, and the average price per unit was $273,000.

The average DOM for the 12-month period ending 4Q 2023 was 177, with an average price per unit (PPU) of $294,087, which is up 12.78% from 2022, which recorded an average PPU of $251,441. The average cap rate for these sales was 4.7%, which represents a 6.38% improvement from 2022.

SALES VOLUME & MARKET SALE PRICE PER UNIT

Source -Costar

5 UNITS SALES

Overall, these figures indicate that the market has settled into an expectation of 5% or higher cap rates based on actual rents. Our on-the-ground experience reveals that lenders are now scrutinizing sellers' books more meticulously than ever before issuing a loan. They are particularly cautious about artificially high rents and cap rates. When underwriting a property, both lenders and buyers are wary of rents that seem above market, such as providing discounts or renting to tenants who may not renew their leases when more affordable options become available. Financing is becoming more accessible for wellmaintained properties with a track record of market rents, low vacancies, and low delinquency rates, especially with the decline in interest rates.

CURRENT SNAPSHOT As of this report, there are 15 listed 5+ unit buildings for sale in Sonoma County, with only 1 currently in escrow.

Having only 1 property in escrow limits the depth of our analysis, so we will refrain from providing more statistical data at this time. Nevertheless, it underscores ample opportunities for buyers in this market segment of the market at the present time.

5+ UNITS OUTLOOK In spite of increased new construction, high interest rates and high inflation, the 5+ unit segment of the market in 2023 managed to surpass the sales volume of 2022, showing a 7% increase; however, Costar reports that most of that activity is centered around 4 & 5 Star new construction inventory, which accounted for $106 million of the $246 million total sales volume. As a result, our sales volume speaks more to the desirability for new construction units for institutions and individuals more than it is indicative of market resilience.

We will continue to monitor the new construction absorption rates and will continue to assess the shortterm and long-term impact that these units have on existing inventory.

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 and other landlord-related legislation, 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

FOR SALE 4 UNITS PRICE:$1,300,000 BUILDING 3,392 SQFT 4 TOWNHOMES 7640 Battery Sebastopol, CA 95472

COMING SOON COMMERCIAL PRICE:TBD BUILDING 2,009 SQFT OWNER FINANCING AVAILABLE 610 DAVIS ST, SANTA ROSA CA 95401

THE SONOMA COUNTY INCOME PROPERTY REPORT Q2 2023

Dear Reader, If you are planning on selling your property sooner or later, we would appreciate the opportunity to provide you with an obligation-free comparative market analysis and marketing proposal. Obtaining the highest possible price for your property takes careful consideration.

Our market analysis includes an “as is” value, as well as partially repaired and fully repaired values. We provide a comprehensive list of recommended repairs and obtain competitive bids that will help you achieve the best possible return on your investment.

If a repaired strategy is pursued, we will oversee all repairs from beginning to end. We have successfully helped income property owners achieve extraordinary results, and hope for the opportunity to show you how we can do the same for you. As usual, we are a phone call or email away if you have any questions. As seasoned agents, we will always have your best interests at heart.

Thank you for your loyalty,

David & Erika Rendino