By Jacob Bourne
Research from JLL indicates that a number of factors have converged to push multifamily asking rents downward, causing building permits for new apartment construction to taper off over the past year. Meanwhile there hasn’t been a corresponding decrease in permits issued for single family homes as pricing and demand remain strong. The data used in JLL’s Silicon Valley Chart of the Week, Multifamily Development Cools While Single Family Construction Maintains Steady Growth, considers a broad definition for single family homes, which includes townhouses.[contextly_sidebar id=”8CxeTkYic7EWBEbAdl14GdLQdghGafIS”]“For economic reasons we’re seeing multifamily start to slow while single family homes still make sense in most parts of the market,” said Stephen Jackson, senior vice president, JLL. “Demand is still there for both product types, but we just don’t have enough renters to pay $4,000 and $5,000 a month for Class A units, and that’s what’s being built; so we’re seeing some concessions and rental decreases as a result.”
Following a five year increase of multifamily asking rents by 64 percent, there was a peak in 2015, but rents have since declined. The Bay Area has one of the highest construction costs in the nation. This coupled with delivery of new Class A apartments to the market marked by slow absorption rates, have made developers less enthusiastic about moving forward with projects. On the other hand, homeownership remains highly desirable in the region as in other parts the country. Median single family home prices in Silicon Valley are holding steady with a 74-percent increase since 2010.
Silicon Valley and many pockets throughout the Bay Area are adding small tracks of single family home developments, often located in areas with old industrial or R&D buildings. The most salient example of larger housing tracks is Newark’s Dumbarton Transit Oriented Development District. The over 200-acre site near the Dumbarton Bridge is slated for 1,500 units of housing, which will mostly consist of detached single family homes and townhouses. The overall supply of single family homes in the region is constrained but the appetite for homeownership is strong making absorption for this product type immediate. The cost of construction is high across the board and is dependent upon land acquisition costs, however single family home construction costs are trending lower versus townhouses and three-story multifamily. While multifamily has become less profitable because of reduced rents, new single family homes with minimal square footage start at around $1 million. This gives developers seeking to build these homes a confidence boost knowing that they’re likely to make a profit instead of merely breaking even.
JLL researchers also found that while migration to the Bay Area is still relatively vigorous, in 2016 only 86 people on average moved to the region per day compared to 121 per day in 2015. With housing affordability issues continuing, especially for middle class earners, overall housing demand may diminish for all product types.
“My prediction is that housing costs have peaked or are peaking, so we’re going to see rents continuing to level off in most municipalities in the Bay Area or declining from the top of the market — people just can’t afford it anymore, and it’s the same thing with single family homes,” Jackson commented. “Developers are always looking at absorption rates to see where they’re going to get a return. They don’t want to build product for buyers who are strapped for cash, because it will result in slower absorption.”