Sacramento Business Journal: Housing Upheaval

By Ben van der Meer

If single-family and multifamily housing are two cities, then to borrow from Charles Dickens, recent months are the best of times, and maybe not quite the best of times, respectively.

Home sales, after a brief pause, have skyrocketed for both new and existing homes in the last seven months, since the Covid-19 pandemic upended daily life, the economy and even the world overall.

Multifamily, on the other hand, saw a longer adjustment period that’s still playing out, reflected in fewer sales and more caution, though experts said those patterns are starting to abate.

“Uncertainty in this business brings concern,” said Brian Nelson, an executive vice president with Colliers International Sacramento who specializes in apartment property sales. “But in the big picture, multifamily in the Sacramento region brings a bright future.”

Colliers’ figures show a definite change in transaction activity once the pandemic set in. The first six months of 2019, when the economy and overall multifamily investment market was still strong, saw 76 sales locally. The first six months of 2020, when the pandemic fully engulfed everyone’s attention starting in mid-March, saw only 45 sales, a 41% drop.

The second quarter of 2020, April through June, saw only 13 multifamily sales. During the recently completed third-quarter period of July through September, the sales number rose to 24 properties, still only about half as many as the same quarter a year earlier.

Other data also suggest multifamily has entered a different part of the cycle. Real estate research firm Yardi Matrix tracked just 31 properties across the entire region offering concessions, or enticements such as a free month for signing a new lease, in September 2019. That was less than 5% of the properties the firm surveyed.

In September of this year, however, the figure went up to 72 properties offering concessions, and 7.7% of those surveyed. The properties now offering concessions include both growth areas like Downtown Sacramento and more established neighborhoods like central Davis and Citrus Heights.

On the other hand, Sacramento is the only major Northern California market that hasn’t seen a drop in rents, said Yardi Matrix manager Doug Ressler. In Sacramento, year-over-year rents went up by about 3% in September; they dropped by 6.6% in San Jose and 5.8% in San Francisco.

A surprising trend

In single-family housing, meanwhile, builders haven’t experienced times this good in more than a decade. Even after home sales began to recover from the Great Recession, overall sales numbers lagged behind what the region saw in the 2000s, with costs and a lack of lots and labor cited as the principal limitations.

Like multifamily and most other sectors of the economy, new home sales dipped in March and April as buyers got cautious and builders pleaded to be able to continue work.

After that, though, even industry veterans like Kevin Carson, Northern California president of The New Home Co. Inc., said they were surprised at what happened. At the outset, the company reduced its office staff locally about 30% as activity slowed, he said, but the lull was only about four weeks.

“It hasn’t slowed down since,” Carson said, noting sales in the third quarter were about 40% higher than in the second. The interest isn’t limited by housing type, either; a condominium project the company is building in Sacramento’s Natomas area is also doing well, he said.

Carson said two major factors have driven the activity: Bay Area migration, and work-from-home policies. In the case of the former, he said, 25% to 30% of the sales are from residents moving from Bay Area addresses. 

But work-from-home might be an even bigger factor, because it’s been a way of life for many companies here and elsewhere for more than seven months now.

“After working from home, they realized their current home doesn’t meet their needs,” he said. Maybe it’s too small, doesn’t have the right setup for working or it’s just not as affordable as a home farther away from an office they’re not as likely to need to visit in the future, he said.

A long-term perspective 

While Carson is more closely following new home sales, those trends are happening in all single-family transactions. For months, local real estate experts have said for-sale inventory has hovered at around a month’s worth of homes or less.

Low inventory typically means a very active market, but those same experts said it’s becoming a cause for concern because with demand consistently outstripping supply, there’s upward pressure on prices and also a cap on overall sales velocity.

Greg Paquin, president of homebuilding consulting firm The Gregory Group in Folsom, said the pandemic is actually playing a role in that shortage of homes.

“People are skeptical about showing their house,” he said, fearful that strangers trooping through their home while they’re still living in it is akin to inviting the virus through the front door.

But demographics will ultimately play a bigger role, he said. Over the next 10 years, the retiring baby boomer generation is expected to make real estate choices that will ripple across the market, Paquin said. At the other end of the homebuyer spectrum, millennials with growing families will also be looking for homes.

For both single-family and multifamily housing, those trends stemming from a more long-term perspective are just as determinative, experts said. The last decade saw a steady stream of Bay Area transplants looking for cheaper housing in the Sacramento region; Covid-19 has simply turned that stream into more of a river.

Ressler, of Yardi Matrix, said there’s also a difference between anecdotes and data. Real estate agents report Sacramento is seeing more Bay Area buyers; even his own firm gets calls asking about less-dense apartment properties, under the assumption Covid-19 spread thrives on more density.

“The jury’s still out,” he said. “We’re waiting on substantive data.” 

Ressler said he’d expect any new multifamily project that’s already begun construction to finish work. If a project hasn’t started, there might be a delay while the developer waits on hard data to emerge. Even then, he said, Sacramento and California have a housing issue beyond Covid-19: a lack of affordable workforce housing.

Nelson, with Colliers International, said he’s seeing apartment investors starting to adjust their offers. Buyers, at least for now, have to factor in the possibility of buying a property where some tenants can’t pay any or full rent while the pandemic blunts the economy, he said.

But rent collections generally have held up better than expected over the last seven months, Nelson said. And the migration effect from the Bay Area has actually helped rents rise in suburban areas. In many ways, he said, the idea that the multifamily market has taken a hit is more based in emotion than reality.

“On the whole, our region for multifamily has taken a hit on confidence,” he said. 


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