East Bay Posts Largest Year-Over-Year Effective Rent Gains

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The East Bay apartment market will perform well this year as demand remains high while development activity is lim- ited to select, desirable areas. After a surge in effective rents in San Francisco and the South Bay, apartment tenants sought the relatively affordable apartments near Oakland transit stops. As a result, vacancy has declined to a very low level, enabling local operators to be aggressive with rent hikes. In fact, the East Bay has posted the largest increase in effective rents in the country over the past 12 months, followed by San Jose. While demand drivers are all positive, the threat of new construction remains limited. Developers are focusing their attention on San Francisco and San Jose, where local municipalities have relaxed opposition to construction and elevated rents support high construction costs. When the pipeline in those cities begins to run dry, builders may refocus on the East Bay, particularly the Tri-Valley area. In the meantime, construction and vacancy will remain low, facilitating strong revenue growth.

The upside potential in the Oakland apartment market is attracting Northern California investors to the area. Although some questions linger about how much additional rent growth can be achieved in the popular areas of San Francisco and San Jose, particularly with thousands of units coming online, rents are poised to advance further in the East Bay. Despite the surge in the past 12 months, effective rent growth is approximately 5 percent lower than in the other Bay Area metros. In addition, interest rates remain low and financing is available, buoying demand from buyers. Meanwhile, owners with plans to divest in the next couple of years will consider listing in the next few months. The recent improvement in NOI will be priced into apartments this year, including assets where rent growth has not been realized by management. In addition, the unwinding of the Fed’s involvement in the capital markets should begin to put upward pressure on interest rates by year end.

West Coast Commercial Real Estate News