People who live and work in California’s State Capitol of Sacramento are still reeling from the de-leveraging effects of the housing collapse. Many workers lost good paying jobs and could no longer maintain their mortgage payments, ultimately losing homes to foreclosure. Others, who were able to keep their jobs, experienced such a dramatic reduction in home values that equity lines of credit were cut off and refinancing to take advantage of historic low rates became impossible.
But, wasn’t this just another "real estate cycle", like the many we have all seen before? Well, to shed some light on this very important question, have a look at the chart shown above, which depicts three booms and busts that have occurred in Sacramento since the mid-1970’s. Notice that each successive boom expanded in both duration and percentage of price appreciation. The first two booms in the 1970’s and 1980’s lasted five and six years, respectively, and yet produced price appreciation of 37% and 48% (adjusted for inflation). However, the third boom ran for an additional three years (nine in total), which produced a rather exponential increase, equal to roughly three times the rate of price appreciation seen in the prior two boom cycles.
Not surprisingly, what goes up, must come down. Each successive bust experienced in Sacramento since the early 1980’s was more harsh and prolonged than the prior period of de-leveraging. In addition, the severity (in terms of price reduction) of each bust almost doubled from one cycle to the next. So, where does that leave us now?
Quite frankly, most apartment owners and commercial real estate investors continue to sit on the sidelines to wait and see what happens. Some owners still haven’t come to grips with the fact their apartments have declined so far in value and choose not to sell unless given no other alternative. On the other hand, opportunistic buyers of apartments for sale in Sacramento (many with cash in hand) are snapping up truly amazing bargains with immediate cash flow in place.
One example involves a group of San Jose investors who recently took full advantage of Sacramento apartments for sale. Investment returns for apartment projects in the Bay Area had become so low (due to increasingly strong demand), these buyers decided to explore nearby Sacramento for better returns. In June 2012, this investor group closed on the purchase of 13 apartment units in a Class C neighborhood of South Sacramento and expects to achieve an un-leveraged annual return (cap rate) exceeding 10% (picture shown below).
Fundamentals for apartments in Sacramento have never been better. According to Marcus & Millichap, asking rents throughout the region are expected to rise 2.6% on average to $943 per month, while vacancy should drop to 3.9% by end of this year. In the meantime, new construction activity is extremely low and generally limited to affordable housing projects. Perhaps all these positive indicators have something to do with the fact there only 28 apartments with more than 10 units currently on the market for sale in Sacramento (according to Loopnet).
All things, considered, it may actually be a very good time to become an apartment investor in the Sacramento area. By taking advantage of professional property management, even an inexperienced owner / operator can participate in unique apartment properties currently available for sale in Sacramento.