— By Rachel Ivers, senior analyst, multifamily investment sales team, and Bryan Danforth and Matt Thomson, senior vice presidents, Compass Commercial —
The multifamily investment sales market in the San Francisco Bay Area is undergoing a noticeable transformation that’s driven by economic pressures and evolving investor strategies. Unlike in previous years — where sellers might list properties to capitalize on market highs or interest rate lows — the current environment is seeing fewer sales motivated by profit.
Many sellers today are cashing out due to expiring fixed interest rates or selling for personal reasons rather than purely financial motivations. This includes circumstances such as inheritance, divorce or retirement. With the Baby Boomer generation, currently aged 60 to 78 and reaching retirement age in larger numbers, we’re beginning to see the front end of significant changes in property ownership. This demographic shift is likely to drive a substantial increase in inheritance sales in the near future as life expectancy hovers around 77.5 years.
A significant factor driving this shift is the belief among many investors that the market has peaked. Concerns about stricter rent control measures, which continue to appear on ballots, are prompting these investors to seek opportunities elsewhere. Markets outside of California are particularly attractive, offering newer buildings, higher cap rates and more favorable returns – all with far fewer regulatory constraints and government intervention. This trend is particularly pronounced among properties built in the 1950s and ‘60s, which comprise a significant portion of the private-client and middle-market supplies. This is certainly the case in San Mateo and in Santa Clara counties, where the aging and maintenance of these structures pose increasingly burdensome challenges.
Retirement is also playing a crucial role in the decision to sell. For many long-term property owners, the demands of managing multifamily properties have become overwhelming as they age. Some of these heirs also lack the property management experience that their parents had. With little desire to take on the responsibilities of property management, many heirs are choosing to sell, further contributing to the supply of properties on the market.
Despite these challenges, current market conditions offer opportunities for both buyers and sellers. Sellers are opting to sell at a discount rather than face the challenges of renovating aging properties, particularly in a strict regulatory environment that makes such upgrades difficult to complete before closing. Meanwhile, cash buyers that are insulated from rising interest rates are capitalizing on this opportunity by offering quick, favorable closing terms that appeal to sellers. This environment presents both new market entrants and value-add investors with the chance to enter the marketplace or reposition existing properties and portfolios to maximize returns and take advantage of future anticipated growth.