SAN FRANCISCO-Multifamily owners and brokers are expecting solid revenue growth in most western markets by 2011, with some core coastal markets experiencing double-digit rent growth, a panel of experts concluded at PCBC’s eighth annual Multifamily Trends event in downtown San Francisco. 

However, owners and operators have been forced to adjust their operations to achieve these projected long-term revenue gains. “From an operational standpoint, we have had to adjust to the marketplace and we worked hard for every dollar we earned. We also worked harder on keeping our existing residents in place,” Ron Granville, CEO of Woodmont Real Estate Services based in Belmont, CA, said during the closing panel at the Moscone Center on Wednesday.

“We sat down with most of our lenders and said: ‘Times are tough. We have to reduce our operating expenses,’” he noted. Woodmont’s goal was to reduce operating expenses by 10%.

Before the downturn, Woodmont was renovating its stock of 1970s and 1980s housing.

“As the economy changed, we found that residents were much more price-sensitive and there were a number of tenants that would not pay up for renovations. We devised a marketing program focused on two market types: fully renovated units and unrenovated units.”

Alfred Pace, CEO of Pacific Property Co. in Palo Alto, CA, faced a similar dilemma during the recession. “We are very much focused on a value-add strategy. As a result, we had to alter our strategy very quickly.”

In the flush years, Pacific Property Co. upgraded units and then increased rents. During the peak of the last cycle, development costs for new class A product averaged $800,000 a unit, according to Pace. Rents required to justify that level of construction averaged $2,700 or more per unit. “Residents had to earn at least $90,000 a year and after the recession, a lot of those jobs were lost.”

Pace added that “REITs, institutions and owners of class A produce did what they had to do and dropped rents to backfill vacancies.”

According to panel moderator Greg Willett, VP of research and anaylsis at MPF Research in Carrollton, TX, tenants are spending more time in their apartments than they had previously. Tenants are increasingly using common-area amenities, he said.

“Our residents seem to be more appreciative of our social events and activities that we conduct on-site. We are working diligently to create a sense of community at our properties,” agreed Pace.

Similarly, on the transaction side, investors are adjusting to the new market norm. “There’s not a lot of product on the market. At the height in 2007, during the first six months of the year, we transacted 112 deals in L.A. County,” explained Stewart Weston, senior vice president investments in the Long Beach office of Marcus & Millichap. Year-to-date, there have been 17 closed apartment transactions in the county, he said.

“We’ve got an incredible amount of money on the sidelines looking for deals,” noted Weston. “This has forced buyers to seek opportunities in other states, and caused cap-rate compression for quality multifamily assets in California. This has the brokerage community scratching our heads. We’re still selling deals in the high 4% and mid 5% (cap rates) for quality product, which is based on 15% lower rents."

Moving into the last half of 2010 and beyond, owners will remain diligent to achieve rent growth and increase occupancies. San Diego, San Francisco, San Jose and Los Angeles were identified by the panelists as markets with strong prospects for revenue growth.

In San Diego, “It’s all systems go,” said Willett, thanks to minimal new product and high barriers to entry. He expects strong rental growth, improving occupancies and revenue growth of between 4% and 5% by 2012.

Pace disagreed, saying that “San Diego is challenging because it’s a 90-degree market and historically we battle with more volatility there. It has great fundamentals but there is potential for valuation risk.”

The panelists agreed that San Francisco, with a current Q1 occupancy rate of 96%, will be among the strongest markets. Although rents are still down on a quarterly basis, Willett expects revenue growth of between 7% and 8% by 2012. “Some people are talking about double-digit rent increases in 2011-2012,” said Willett. “We are not that aggressive, but if it’s going to happen anywhere in the country, it’s in the Bay Area.”

Pacific Property Co.’s Northern California properties are currently 96% occupied, said Pace. “That’s a market in balance, perhaps leaning toward landlord pricing power,” noting that pricing power is driven by demand for one-bedroom units.

In San Jose, Willett is forecasting revenue growth of 5% in 2011 and 7% in 2012. “If I had to pick one city where there is not one bad submarket, it would be San Jose.”

Willet expects moderate revenue growth in L.A. County: 4% by 2012. Weston is more bullish on the market from a transaction perspective. “Core L.A./Orange County assets are trading at a cap rate of 5% to 5.5%, or even less than 5%,” Weston said. “For each quality class B property we show in both L.A. and Orange counties, we are getting 40 to 50 tours from interested investors,” he added.

Even in the far reaches of the Inland Empire’s Coachella Valley, Weston recently sold a 200-unit apartment building in Desert Hot Springs for $5 million, or $25,000 a unit. Willet expects the Inland Empire apartment market to see revenue gains of between 1% and 2% by 2012, which is promising considering the depth of the single-family foreclosure crisis in that region.