New inventory slowing Bay Area multifamily market’s growth.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JULY OF 2016
By Nancy Amdur[dropcap]S[/dropcap]oaring rents and home prices combined with limited supply and an influx of well-paying technology jobs helped create a robust San Francisco Bay Area multifamily housing market. But with new projects coming online, some market shifts may be on the horizon, industry experts said.
“It’s still a healthy market, but we do have a lot of new construction underway [and] a lot of construction planned,” said Robert Sammons, regional director of Bay Area research at real estate brokerage Cushman & Wakefield in San Francisco. “We still see rather steady growth but just not at the record levels we’ve seen over the past six or seven years. This is the new reality setting in.”
“My view is that rent growth is moderating, and particularly moderating at the highest end of the market,” said Alfred Pace, co-founder and CEO of Palo Alto-based West Coast apartment investor Pacific Urban Residential.
The Bay Area’s average rent across all unit types was $2,482 during the first quarter of 2016, a 7.1 percent jump from the same quarter last year—but a smaller leap than its recent double-digit annual increase, according to a multifamily report by Cushman & Wakefield. San Francisco County is the priciest apartment market in the region, and the city’s average rent of $3,620 rivals Manhattan as the country’s most expensive area, the report states. The average Manhattan rent as of April 2016 was $3,957, according to report by MNS Real Estate.
A large development pipeline could allow the region to “play catch up,” Sammons said.
“We are woefully under-inventoried for the entire Bay Area,” he said, adding that “We are in danger of pushing people out of the Bay Area just because of the cost of living here.”
There are 576,000 existing apartment units in the Bay Area and approximately 23,300 housing units are under construction, according to Cushman & Wakefield. San Francisco accounts for about 8,000 of those units, followed by Santa Clara County with roughly 7,800 units under construction. The region’s housing stock grew by less than 40,000 units between 2010 and 2014, according to a report by the Association of Bay Area Governments.
Vacancy rates also are expected to tick up as new supply is added. Bay Area apartment communities vacancy for the first quarter 2016 was 4.2 percent, up from 3.6 percent in the same quarter of 2015, according to Cushman & Wakefield. The company expects vacancy to rise to about 5 percent as new housing inventory is delivered.
Pacific Urban Residential, whose holdings mainly include properties that are at least 15 years old, finds that its portfolio throughout the West posts “95 percent or better” in occupancy, Pace said. The company’s product caters to a broad market, he added, and its Bay Area multifamily units post an average rent of about $2,200 per month. Pacific Urban Residential typically seeks suburban “close in” developments near jobs, transportation and good schools, Pace said, in areas such as San Mateo, Fremont, Santa Clara and San Jose.
Leasing agents are finding that demand for apartments renting for below $3,000 is strong, but there is now some “resistance” among renters to lease units in the $4,000 to $6,000 range, said James Devincenti, an executive vice president of the multifamily investment services group at real estate brokerage Colliers International in San Francisco. Transit-oriented developments located near BART, Caltrain or Muni lines tend to perform well, Sammons said.
The number of apartment transactions decreased in the first quarter this year—with 165 transactions totaling $1.41 billion compared to 253 transactions totaling $1.21 billion during the same quarter last year, according to Cushman & Wakefield. Among the largest recent transactions was a Menlo Park-based Sand Hill Property Co. affiliate’s $412.5 million purchase of the 1,812-unit Woodland Park apartments in East Palo Alto. The seller was Equity Residential.
A lack of housing supply is helping to push sale prices upward. For example, the sale price for rent-controlled San Francisco properties with 10 or more units averaged $549 per square foot this year, up from $508 per square foot last year, Devincenti, said. Most buyers include local investment groups and individual buyers, he said.
Investors’ interest in the area’s multifamily sector is projected to continue. “This is a market that has been very resilient, even in downturns,” Devincenti said, adding that the Bay Area’s position as a technology hub also keeps the market strong. “It should do well in the long run,” he said.