By Meghan Hall
A new report released by Colliers International indicates that while total sales volume of multifamily assets has decreased across Northern California, the market remains resilient. Colliers sites two main reasons for the market’s continued stability. Low unemployment rates have driven down vacancy rates, while a development deficit has caused widespread inventory shortages across the Bay Area. The report analyzed properties which closed at over $1 million and contained five or more units in ten Northern California counties.
By the end of the first half of the year, approximately 370 multifamily developments sold, generating $3.6 billion in transaction volume.
In Q1 and Q2 of 2017, Alameda County had the highest total number of sales at 100, where the annual sales volume has steadily climbed since 2010. Of the ten Northern California counties, Sacramento was the only other county that also experienced steady growth in multifamily property sales. Sacramento sold 120 properties in 2016, up from 56 in 2012. This year Sacramento is on track to match its 2016 sales numbers; in Q1 and Q2 of 2017 60 properties sold.
San Francisco County had 82 sales in the first half of 2017, ranking second behind Alameda County. Third was Sacramento, followed by Santa Clara with 40 sales and San Mateo County with 30. Contra Costa County posted 27 sales as of the publishing of the report.
Napa County had the lowest number of sales in the first half of 2017, with four properties sold. Sonoma, Solano and Marin counties fared only slightly better, selling 8, 9 and 10 properties, respectively.
However, as Kaiser Permanente, Salesforce, Gentech and Facebook establish themselves in the Bay Area, unemployment rates have declined across all ten counties, increasing demand for readily-available units. The average unemployment rate in Northern California was 3.9 percent in July 2017, almost 1 percent lower than the state average and 0.5 percent lower than the national rate.
San Mateo now boasts the lowest unemployment rate, at 3.2 percent, while Sacramento County has seen its unemployment rate plummet since 2011, dropping from 7.5 percent to 4.5 percent. Napa county’s unemployment rate is also at an all-time low of 3.9 percent.
Influxes of newly hired workers and low unemployment rates have also led to decreasing vacancy rates. All ten counties have vacancy rates of around 5 percent or lower. Alameda and Napa counties had the lowest vacancy rates during the first half of 2017, at 3.8 percent. San Mateo County topped the list at 5.3 percent and San Francisco County came in at a close second of 5.2 percent.
The desire for rentals has also increased simply because many families cannot afford to buy a home across Northern California. Despite a drop in unemployment, increases in housing prices easily outstrip rising income, as multifamily deliverables have failed to keep up with job growth. “Economic fundamentals are not improving with employment growth,” explains Colliers’ Vice President Kalah Espinoza.
Coupled with the strong demand for multifamily products is an inventory shortage; Northern California’s large development deficit has kept the number of new multifamily housing developments to a minimum.
High construction costs, the current political climate and even Not-In-My-Backyard attitudes have restricted multifamily development. Ryan Wagner, senior vice president at Colliers International notes that “the lack of high-density rental housing near major transportation hubs has become the Achilles’ heel of our Bay Area economy.” While all ten Northern California counties have reported increases in multifamily inventory, development is lagging.
Seven out of the ten counties reported inventory growth of 5 percent or less between 2010 and 2017. Only three counties had larger increases in total unit inventory. Santa Clara County has had the most growth, with 21,183 units constructed, a 13 percent increase. San Francisco County constructed 15,358 new units, an increase of 12 percent while San Mateo County grew its inventory by 4,699 units or 7 percent.
The lack of available multifamily residences also poses a significant problem for Sonoma and Napa counties, where the recent Tubbs Fire has damaged entire communities. “The losses in the ongoing North Bay fires have been staggering,” says Wagner. “We estimate that approximately 1,000 rental units have been heavily damaged or destroyed in the fires.” When Colliers’ report was initially published, Sonoma County had 308 planned deliveries for the second half of 2017, and no new deliveries were planned for Napa County.
While multifamily development is progressing at a slow rate, there are, however, numerous projects coming online throughout the Bay Area in Q3 and Q4 of 2017. Most of these deliveries are concentrated in Santa Clara, Alameda and San Francisco counties. Alameda had 6,907 developments under construction mid-way through 2017, while Santa Clara had 9,213 deliveries and San Francisco had 5,721. Many projects scheduled to finish this year are low to mid-rise buildings with at least a hundred units. Projects such as Turing at The Fields by Lyon Living and Station Park Green by Essex Property Trust Inc., will deliver a combined 970 units, gently easing the shortage of multifamily developments.
Despite a dip in overall sales volume, market fundamentals such as rent growth and price per unit continue to rise due to an increase in demand for multifamily product. The already tight rental market means that even as development projects are completed, the Northern California multifamily market will remain stable.