Approaching the Housing Peak

housing, San Francisco, Integra Realty Resources, Bay Area, South Bay, Oakland, Walnut Creek, Concord, BART, Paragon Real Estate Group, Colliers

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Landscape changes for San Francisco’s multifamily market, but the main drivers stay mostly the same.


By Robert Celaschi

[dropcap]S[/dropcap]an Francisco’s multifamily market is nearing the top of its cycle, according to at least two commercial real estate market reports. But being San Francisco, it’s likely to be a broad top as demand is still slightly exceeding supply.

Integra Realty Resources’ annual Viewpoint report forecasts San Francisco having net absorption of only 370 units a year through 2018, down from an average of 1,148 for the past four years. The report pegs San Francisco as passing through the final stages of an expansion phase.

[contextly_sidebar id=”Y7Obla1iZfywu6lI9wYPJyRWQiVWAJOk”]”It is important to note that these are net absorption figures. So this number reflects the number of units absorbed after factoring in new construction,” said Brady Barbier, managing director at Integra’s San Francisco office. “The positive 370 units reflects that, despite the significant number of units coming on line in the next three years, all of these units and then some are expected to be absorbed, resulting in a slight downward impact on the vacancy figures in San Francisco.”

All three Bay Area submarkets—San Francisco, the South Bay and Oakland—saw strong multifamily net absorption over the past three years as the tech boom lured new residents faster than new supply could be built. Now supply is finally catching up, Barbier said, bringing a stabilizing effect to rental rates.

Large multifamily projects are just now coming online in Oakland and the East Bay, so Integra expects net absorption figures there to stay strong in the near term. The East Bay also benefits from some renters getting priced out of the San Francisco market and heading over the Bay Bridge, with a major focus on locations at or near BART stations. Even Walnut Creek and Concord will benefit from this eastward migration, Barbier said. Concord is in the process of evaluating three options for a massive 1,000-acre master planned community that could bring as many as 5,400 housing units, all of which would be minutes from the BART station.

Given the difficulties associated with entitling and developing in San Francisco, the city rarely gets overbuilt, he said.

Paragon Real Estate Group also shows buying activity slowing down, but not for lack of interest. While there are fewer multifamily listings, they are selling faster. The average time on the market dropping to 50 days in the fall of last year, the Paragon report said.

Because of the huge variety of multifamily properties—size, age, location and quality of buildings—median and average statistics are gross generalities, Paragon cautions. But the story is in the overall trends.

About 3,100 residential units of all types—rental, sale and social-project—were built in San Francisco in 2014 and almost 7,000 are currently under construction in the city, Paragon said.

“Adding large quantities of new inventory should eventually affect the recent, high-appreciation dynamic for both sale and rental markets, but so far, population, employment, wealth and buyer demand have continued to outpace supply,” the report concluded.

The only spike in San Francisco inventory came in the month after Labor Day last year, possibly driven by seller concerns over Proposition G. That measure would have imposed an extra transfer tax on multifamily properties owned less than five years. After Prop. G was defeated in November, the spike in listings ended.

Average values per square foot have been climbing since the market hit bottom in 2009, and last year it reached $435 in San Francisco. Overall, values per square foot have increased more than 60 percent since the bottom of the market in San Francisco and Alameda counties, Paragon reported.

Combining all these factors makes this a great time to unload multifamily property all through the Bay Area.

“However, the expectation is that apartments in prime locations will continue to cash-flow very well, and this property type has historically provided a very stable investment, so many owners want to stay in the market and enjoy this steady income,” Barbier said.

The strongest demand now is for the smaller and older properties, he said. Investors see upside potential in capturing higher rents through renovations or turnover from rent control units, or both.

“The bigger players in San Francisco essentially see the multifamily market in the city as poorly managed by primarily ‘mom-and-pop’ owners that don’t know how to maximize net income or don’t have the resources to do it like a larger operator does,” he said. Those resources include leasing teams, management teams and construction teams.

But demand stays so strong in San Francisco and the most desirable parts of the South Bay that many owners feel confident holding on despite the high selling prices because they are confident in the cash flow, he added.

There’s one more explanation of how the market is shifting, this one from Brad Lagomarsino, executive vice president at Colliers International. In the Great Recession, large portfolios of multifamily properties were taken back by lenders. As the market went back up, speculators grabbed some of that for a few years and sold it off.

“All that inventory has been sold off by institutions to private equity,” Lagomarsino said. Those who bought in the last round are long-term investors he added. Some mom-and-pops are selling now, but there has been such a run-up in rent that owners wonder what they could trade into that would justify selling in this hot market.

“There are certainly people who are sick of management, going through a divorce, or inherited an asset and can’t afford it. But that is a very small percentage of who owns property in San Francisco,” Lagomarsino said. The private client market has owned these buildings for generations and live off it.”

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