Demand continues to soar due to the economic activity and natural disasters in the region.
New multifamily complexes are sprouting around the Bay Area, driven by the region’s expanding technology-focused workforce and rising apartment rents.
Right now, 30,222 apartment units are under construction throughout the nine-county Bay Area, according to statistics compiled in June of 2018 by JLL, which tracks the industry. That compares to the 11,229 units that were in development at the same time last year, according to the report.
Despite the increase, there still aren’t enough apartments to meet the nine-county region’s current and future housing needs, says Stephen Jackson, senior vice president of JLL Capital Markets, Multifamily. “The National Multifamily Housing Council say we could use 75,000 new units today, and that would just cover the demand in today’s market,” Jackson said. “That doesn’t even account for what we would need the following year.”
The demand is proving that it’s still a good time for developers to get in.
Population growth is estimated to add 2.1 million new residents by 2040, according to recent projections from the Metropolitan Transportation Commission, which allocates state transportation funding.
Adding to the region’s housing headache: rising demand for apartments following last October’s destructive wildfires, said Jackson. Those blazes destroyed thousands of housing units, leaving residents in Santa Rosa and elsewhere in Napa and Sonoma counties looking for places to live.
In addition to wiping out housing stock—at least temporarily—the disaster significantly drove up apartment rents in the region. Rents in Santa Rosa county jumped nearly 7 percent, to $2.30 per square foot. In contrast, rents rose a nominal 0.9 percent in San Francisco and were up about 2 percent in the East Bay and 3 percent in San Jose, JLL said.
At the same time, with housing more in demand due to the fires, apartment vacancy rates in Santa Rosa shrank to just 2.1 percent, the tightest in the region. As a comparison, vacancy rates in San Jose, San Francisco and the East Bay hovered between 4.1 percent and 4.8 percent during the same period.
Those vacancy rates—still considered low by industry standards—reflect the Bay Area’s popularity as a technology hub and draw for a growing number of high-paying jobs. “What this really tells us is we’re in a very healthy economy here in the Bay Area,” Jackson said. “[Apartment] rental rates are extremely high, but there seems to be a strong demand for those units. It’s a pretty compelling argument to invest in housing.”
And investing they are. The future apartment supply pipeline appears to be on an upswing, said JLL’s report. The number of permits issued for new residential construction rose 20 percent last year, including a 27 percent increase for multifamily and a 7 percent increase for single family projects. Of the total units now under construction, 11,354—more than a third of the total—are located in the South Bay.
While these new projects will add to the region’s housing choices, demand continues to outstrip supply, especially for affordable housing, according to the report. Companies are continuing to back multifamily complexes throughout the Bay Area, even in the midst of rising construction costs and tough building regulations.
“The demand is proving that it’s still a good time for developers to get in,” said Bob Staedler, principal of Silicon Valley Synergy, a land use planning consultancy based in San Jose. With so many new apartments near public transportation hubs coming online about the same time, Staedler said, rent growth might temporarily “pause” while traffic snarls could ease. “There are a lot of positive factors for the Bay Area market,” said Staedler. “We’ve never had a cycle that I can recall that we’ve built too much.”
The two largest projects in the Bay Area are located in Santa Clara. With 851 market-rate units, Santa Clara Square II is expected to open in this fall and is developed by The Irvine Company. Right behind in size is Monticello, another market-rate development by Irvine, with 825 units.
Other major developments include the 694-unit Center Pointe Drive in Milpitas, which is built by SummerHill Apartment Communities. Slated for completion next year, the complex is the largest single development in the company’s pipeline. A major draw is Center Pointe’s location just one block away from the upcoming Milpitas BART station.
Locating apartments near public transit hubs is the next wave for developers, according to architect Ashehh Saheba, a partner with the San Francisco office of Steinberg Hart Partners.
His company is serving as architect for a transit-focused, twin-tower apartment complex in downtown San Jose, the 630-unit MIRO complex. This project will be built on East Santa Clara Street across from City Hall and near a new BART line that is planned to run along Santa Clara Avenue that is expected to open late next year.
Given job growth and the resulting traffic congestion, Saheba said, “the opportunities occurring in density around transit is a sustainable model in the region.” He said that in Redwood City, for example, multifamily developments are benefiting from “just being close to employment, on the Caltrain line. It has that ‘city feel.’ Those are the three major features that drive where the tenants of today want to live. They want to be in a walkable city with [public] transportation.”
A nod toward affordability is also driving some new apartment projects. Fourty of the apartment projects on JLL’s “under construction” list are identified as partially affordable, with various organizations attempting to expand the amount of apartments that are priced within reach of working- and middle-class residents.
Most complexes containing affordable units are built in San Francisco. They include 1532 Harrison, which includes 136 units and is under development by a coalition comprised of San Francisco-based Build and Denver-based UDR.
Other apartment complexes with affordable units that are going up in San Francisco include 1066 Market, which has 304 units. Shorenstein Properties is the developer.
In total, nearly 9,400 apartment units, both affordable and market rate, are now under development in the East Bay’s Alameda and Contra Costa counties, said JLL. More than 5,700 units are being located in San Francisco, while 3,560 are being constructed in San Mateo.
In Marin, Sonoma and Napa counties, where last fall’s fires struck, just 242 units are under construction, said JLL.