SAN FRANCISCO-Multifamily owners and brokers are expecting solidrevenue growth in most western markets by 2011, with some corecoastal markets experiencing double-digit rent growth, a panel ofexperts concluded at PCBC’s eighth annual Multifamily Trends eventin downtown San Francisco.

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

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

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

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“As the economy changed, we found that residents were much moreprice-sensitive and there were a number of tenants that would notpay up for renovations. We devised a marketing program focused ontwo market types: fully renovated units and unrenovated units.”

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

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In the flush years, Pacific Property Co. upgraded units and thenincreased rents. During the peak of the last cycle, developmentcosts for new class A product averaged $800,000 a unit, accordingto Pace. Rents required to justify that level of constructionaveraged $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 werelost.”

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Pace added that “REITs, institutions and owners of class Aproduce did what they had to do and dropped rents to backfillvacancies.”

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

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

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Similarly, on the transaction side, investors are adjusting tothe 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, wetransacted 112 deals in L.A. County,” explained Stewart Weston,senior vice president investments in the Long Beach office ofMarcus & Millichap. Year-to-date, there have been 17 closedapartment transactions in the county, he said.

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

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Moving into the last half of 2010 and beyond, owners will remaindiligent to achieve rent growth and increase occupancies. SanDiego, San Francisco, San Jose and Los Angeles were identified bythe panelists as markets with strong prospects for revenuegrowth.

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In San Diego, “It’s all systems go,” said Willett, thanks tominimal new product and high barriers to entry. He expects strongrental growth, improving occupancies and revenue growth of between4% and 5% by 2012.

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Pace disagreed, saying that “San Diego is challenging becauseit’s a 90-degree market and historically we battle with morevolatility there. It has great fundamentals but there is potentialfor valuation risk.”

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The panelists agreed that San Francisco, with a current Q1occupancy rate of 96%, will be among the strongest markets.Although rents are still down on a quarterly basis, Willett expectsrevenue growth of between 7% and 8% by 2012. “Some people aretalking about double-digit rent increases in 2011-2012,” saidWillett. “We are not that aggressive, but if it’s going to happenanywhere in the country, it’s in the Bay Area.”

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

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

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Willet expects moderate revenue growth in L.A. County: 4% by2012. Weston is more bullish on the market from a transactionperspective. “Core L.A./Orange County assets are trading at a caprate of 5% to 5.5%, or even less than 5%,” Weston said. “For eachquality class B property we show in both L.A. and Orange counties,we are getting 40 to 50 tours from interested investors,” headded.

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

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Natalie Dolce

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.