Marcus & Millichap Bay Area Real Estate Forecast: More and Better

Union Square San Francisco retail real estate

By Sharon Simonson

San Francisco Bay Area employment remains below its dot-com peak, but today’s jobs in technology and business and professional services are more lasting compared to the earlier era, according to new findings from Marcus & Millichap Research Services.

[contextly_sidebar id=”9bce510041fff72d7c52e6aab7ba81d9″]San Jose and San Francisco are among the top-10 jobs-producing metropolitan areas in the country today based on their employment growth rates over the last 12 months, the brokerage finds. Together with the Oakland metropolitan area, the region is growing on the order of 100,000 jobs a year and should maintain that pace for the next several years, Hessam Nadji, Marcus’ managing director of Research and Advisory Services, said.

“The high-tech jobs that have come back to us are very different from the boom,” he said. “These are very, very profitable companies that are dominating the age of e-commerce and electronic servicing, which is what the jobs are about.”

Still, in absolute numbers, the region has fewer jobs today than in the late 1990s. During the seven-year dot-com sugar high that ended in 2000, the region created not quite 650,000 new jobs. The bust that followed eliminated 411,000 of them, according to the brokerage’s research.

During the mid-decade national and international housing boom, the region again grew, adding 146,000 jobs from early 2004 to early 2008. But that relatively weak recovery was followed by another big loss of 238,000 jobs during the Great Recession.

The region is now growing jobs again—203,000 since the beginning of 2010. But with approximately 2.9 million jobs today, the Bay Area total remains below the 3.2 million reached at the end of 2000.

In this commercial real estate recovery large institutional investors dominated the acquisition scene early on. But in the last 18 months, private investors returned to the market, he said. The recent surge in the for-sale housing market has spooked some apartment investors, and Marcus counts a pipeline of up to 20,000 new apartments in the Bay Area in the next several years.

But after four years of repressed household formation and little new housing construction he remains sanguine that demand is strong enough to support both the for-sale housing and apartment markets. “In the Bay Area over the next five years, we should add somewhere around 90,000 18- to 34-year-olds. Where are they going to live? There is a lot of pressure on the demand side,” he said.

Nadji presented the brokerage’s economic and real estate outlook at San Francisco’s Westin St. Francis Hotel on Union Square, addressing approximately 375 attendees. A second discussion centered on San Francisco’s new city ordinance to require seismic upgrade to a common class of city structures often called “soft-story buildings” based on their multiple stories of housing above a first-story parking garage.

The ordinance addresses wood-frame buildings constructed before 1978 with five or more housing units, said Patrick Otellini, director of Earthquake Safety for the City and County of San Francisco. Of the roughly 5,000 buildings that the city has identified that fit the description, most are rent-controlled apartments, though some house small businesses.

The city estimates that about 3,000 of these buildings will need to be retrofitted at a cost of about $60,000 to $130,000 each. “The soft-story retrofit is a way to keep people in their homes, not dislocated to a shelter away from the city,” Otellini said. “After an earthquake, if your housing stock is depleted, people leave the city and don’t come back.”

Not quite 60,000 people live in these apartments. Owners are to complete the improvements over the next seven years with properties that house sensitive uses such as day cares or public gathering spaces such as churches to be completed first, he said.

Nadji said that despite concerns about out-of-control demand for Bay Area apartments driving investor yields to 4 percent and less, the quality of the assets that are trading and the long-term timelines for the investors make the deals make sense.

He also anticipates “very strong years” for the office market this year, next year and in 2015. “There is truly a value play in the bread-and-butter class B and C buildings that could use a lift.” The same approach is viable in the retail sector. “Despite the Internet and online sales, retail is still a great investment. There is great opportunity in value-add,” he said.

West Coast Commercial Real Estate News