By Joe Gose
Ramped-up apartment development in the East Bay could begin to slow the rate of rent growth after three years of robust expansion.[contextly_sidebar id=”5f88072eb005bb958fadc18e308953f8″]Some 2,500 units are under construction in the market, and an additional 5,000 units are in the planning pipeline, according to Calabasas-based brokerage Marcus & Millichap Real Estate Investment Services. The anticipated supply increase of 2,100 units in 2013 would nearly triple the number of units added to the East Bay in 2012, said the firm in its third quarter Oakland-East Bay apartment report.
New projects ready for occupancy include SummerHill Apartment Communities’ 301-unit Paragon in downtown Fremont and Essex Property Trust’s 309-unit Connolly Station near the West Dublin BART station.
To a large degree developers are pursuing projects near transportation hubs because transit-oriented developments (TODs) tend to serve community interests and traverse entitlement gantlets with fewer hiccups than other proposed developments, said Jeff Mishkin, first vice president and regional manager for Marcus & Millichap.
In addition to Connolly Station, TOD development projects include Mill Creek Residential Trust’s 126-unit North Main Apartments in Walnut Creek and AvalonBay Communities’ 253-unit Dublin Station II. AvalonBay also is building the 94-unit Archstone Berkeley on Addison near Berkeley’s Amtrak station, while SummerHill, a division of Marcus & Millichap Co., is developing the 300-unit Brio four blocks from a Walnut Creek BART station.
The East Bay supply surge, however, will push the average vacancy rate 60 basis points higher to around 4 percent by the end of the year, Marcus & Millichap predicted. That’s still tight, but the average monthly rental rate of $1,575 at year’s end will represent a year-over-year increase of 3.3 percent, less than half the growth in 2012. Still, East Bay apartment rental rates have ballooned an average of 21 percent since early 2010, the brokerage noted.
That has worked out well for savvy deep-pocketed investors that bought land on the cheap when uncertainty still plagued the economy, said Mishkin, who is in the brokerage’s Oakland office.
“They had enough guts and faith in the long-term market to take gambles,” he said. “Obviously, those gambles have really paid off.”
Developers that have broken ground or that are about to begin renting still have reason to be optimistic, he added. Job growth, for example, is improving after a slow start this year. Nonetheless, the wild card of rising interest rates could make development much costlier and riskier, Mishkin said.
Rent and vacancy divergence is already emerging among various East Bay communities. While the Oakland-Berkley submarket’s $1,882-a-month average rent in the second quarter represented a 7.7 percent hike over the same period a year earlier, East Contra Costa County apartment owners saw rent gains of only 1.5 percent. The average monthly rent in East Contra Costa County, which is also competing against an improving single-family housing market, was $1,125 in the quarter.
Meanwhile, landlords in five of the nine East Bay submarkets saw vacancies increase in the quarter. The Livermore/Pleasanton area’s average vacancy rate climbed the most – 120 basis points to 4.1 percent from a year earlier. On the flip side, the vacancy rate in Fremont dropped 10 basis points to a market-best average of 2 percent, and landlords raised monthly rents 6.7 percent to $1,617 from a year earlier.
Despite predicting a slowdown in rental rates, Mishkin and others expect the East Bay market to remain in demand thanks largely to the market’s affordability when compared with surrounding Bay Area communities.
During a quarterly earnings conference call this summer, for example, executives with Palo Alto-based Essex Properties predicted that the East Bay would continue to benefit from annual rents spikes of around 10 percent in popular areas such as San Francisco’s South of Market Street (SOMA).
While some technology workers are receiving robust wage increases and can afford the escalating housing costs, others in the industry are fetching raises of only 2 percent to 4 percent, if that, said Essex CEO Michael Schall. That will require the technology “have-nots” to consider the East Bay as an alternative.
“[The] East Bay will be a logical place to go because there are still some very good markets within the East Bay and they’re not as expensive as some of the better locations,” he said.