The East Bay city is looking to become a major housing supplier to the region.
Anyone wondering what’s ahead for the Bay Area’s apartment industry should take a look at Oakland. After a pronounced lull, rents have roared back in that city, as they have across the Bay Area, says a report from leading real estate and investment management firm JLL.
Rising demand for apartments has triggered greater competition among multifamily builders, and would-be renters are seeing an array of ritzy features in many of the new complexes that are opening.
You are really looking at some of the highest rents in the nation.
Gone are white Formica countertops and cheap cabinets. In their place: floor-to-ceiling windows, the kind of high-end light fixtures one might expect to find in a custom-built house and plenty of other premium upgrades.
“It’s completely changed,” said Stephen Jackson, senior vice president of JLL Capital Markets, Multifamily, referring to the surge of new construction and “amenitizing” of apartments in Oakland.
The transformation took years of economic shifts to materialize and was buoyed by Oakland’s recent rise in home prices and rents. In June, the average apartment in Oakland rented for $2,497 per month, up 6 percent year-over-year, according to RENTCafé. That data firm is owned by Yardi Matrix, a Santa Barbara-based real estate investment and property management company.
Housing prices in the East Bay city have also climbed. In April, the median home value in Oakland was $757,700, up 12.2 percent from the same period the prior year, according to industry-tracker Zillow. Oakland is experiencing rising demand for apartment rentals as availability shrinks for starter homes. Those single-family houses carry prices that are largely out of reach for first-time buyers—even professionals with six-figure incomes.
By some estimates, an annual household income of about $210,000 is required to buy a median-priced, $920,000 Bay Area home. But the U.S. Census pegs the actual median family income in the area at about $99,000—less than half the amount needed. That disparity has left plenty of people seeking apartments to rent.
Heftier building costs are also a factor in Oakland’s rising rents. Prices are up across the region for everything related to construction, from nails, sheetrock and lumber to engineering fees, building permits and skilled labor. Increases in those areas have pushed up overall construction costs by about one percent every month for the past couple of years, Jackson said.
In response, some developers put their apartment development projects on hold, hoping costs would settle down. With today’s higher sale and rental prices as enticements, however, many developers have opted to reenter the market, and their projects are back on track.
“Fifteen years ago, rents were $1 or $1.50 per square foot. Today, rents are $4 or $4.50 per square foot. So, you are really looking at some of the highest rents in the nation,” Jackson said.
He added that in order to command those top-tier rents, builders have discovered “it’s just not supplying a bedroom to a tenant. It’s supplying high-end, luxury living with amenities.”
That’s evident at one of Oakland’s newest apartment projects called Town29, which is located at 2919 Telegraph Ave. between the MacArthur and 19th Street BART stations. The complex has 162 efficiency, one-bedroom and two-bedroom apartments with stainless steel appliances and hardwood floors that rent from $2,210 to $4,620, according to real estate website Trulia. The project, developed by Madison Park Financial, has been leasing 35 units per month, a rate that’s outperforming the company’s initial projections, Jackson said.
With both housing prices and rents surging, more developers have spring-boarded into Oakland, igniting the city’s biggest building boom in decades.
JLL’s research shows that 33 apartment complexes are currently under construction in Oakland, with the first waves of leasing expected to start late this year. The largest of those complexes, at 1314 Franklin Street by developer Carmel Partners, is a 40-story building with 634 units. Leasing there is expected to start in late 2019.
Actions by Oakland city leaders and others to create more residential options have helped transform the city, according to Jackson. “There are no retailers going in. Almost every building is going from office-retail to apartments, being renovated and cleaned up. Officials there said, ‘we have a lot of blighted corners…and we need to get rid of these ugly lots and create housing.’”
While the surge of new apartments in Oakland is good news for people able to afford them, the rising competition means builders might need to offer rent concessions at some point in order to keep tenants coming their way. With more new apartments in the city, Ten-X Commercial Research’s Chief Economist Peter Muoio predicts that Oakland’s apartment rents “will see a cumulative drop of four percent during the cyclical downturn, far outpacing the national average.”
Jackson doesn’t believe that more apartment vacancies are on the horizon for Oakland, given the city’s massive and unique housing needs. There’s a dearth of newly-constructed complexes, he said, with most buildings dating back to the “20s, 30s, 40s, 50s and 60s.”
The handful of new apartment buildings that have opened in Oakland so far have reported “above-average absorption rates, and [the landlords] have been raising rents,” said Jackson. “Our belief is the demand is so high, they will be absorbed. This isn’t an average market that we’re in.”