Report: “Great Migration” is Underway, but Most Transplants Remain in California

Colliers International, San Francisco, Silicon Valley, Redwood Gardens Apartments, View at Marin, Luxe Ripon, Press at Midtown Quarter
Courtesy of Daiwei Lu

By Meghan Hall

The economic impacts of the COVID-19 pandemic have greatly impacted core, urban markets, and stories about migrations out of denser neighborhoods—and out of California—have been circulating widely over the past several months. Lower density and less expensive multifamily markets held up well over the course of 2020, as investors followed renters to new markets. A biannual Northern California multifamily market report released by Colliers International provides new insights into the migration patterns and multifamily market’s fundamentals through the first quarter of 2021. However, one important fact has emerged, which could serve to bolster local markets: migration thus far has remained relatively close to home.

“In general, there has been a substantial shift out of the urban core in Northern California,” explained Colliers’ Executive Vice President Ryan Wagner. “…But I think what the data shows us is that people were not necessarily moving to Austin, to Boise or to Atlanta. A lot of people were moving to within 60 to 90 miles of where they were living, just to cheaper areas in the Bay Area.”

Wagner continued, “We didn’t see this mass migration out of California; it was just temporarily out of the urban core, because the urban core was not activated anymore.”

Prior to the pandemic, domestic migration was at just 9.3 percent, a 73-year low, according to Colliers. Over the last 12 months, however, migration has increased significantly. Colliers and The NPD Group estimate that 28 percent of Americans have considered relocating recently, a 20 percent increase year-over-year.

According to Brandon Geraldo, also part of Colliers’ Multifamily Capital Markets Group, 80 percent of those moving out of San Francisco were remaining in California. Two-thirds of those moving were remaining in the Bay Area specifically. The East Bay benefited most from this migration, with as many as between 20 to 25 percent of those leaving the urban core targeting the area.

For those at Colliers International, the shift in migration patterns had been underway for some time, as tenants sought cheaper accommodations and more space. Colliers also notes that as the millennial population becomes more established, many are also becoming first-time homebuyers or looking to establish roots in different neighborhoods. However, the advent of the pandemic expedited the most recent flight to suburban markets faster than previously imagined.

“I think in some ways, the pace of these trends surprised me,” said Matt Kroger, another executive vice president with Colliers International. “But what we are now seeing as part of the core Bay Area investment thesis is a larger area, including markets well North, well East and well South.”

Region-wide, the occupancy rate declined 190 basis points year-over-year to 94.4 percent by the end of 2020. The regional average effective monthly rent dropped nine percent year-over-year to $2,425, and concessions have increased across the board as landlords seek to fill vacancies. 

Across individual submarkets, the Northern California multifamily market reflects the trends and migration patterns that have become apparent over the past year. Suburban assets have tended to fare better, while those in core markets have seen fundamentals compress significantly. In San Francisco and the Peninsula, effective rents declined 20.8 percent and 15.5 percent, respectively. All submarkets, except for the North Bay, posted occupancy losses. 

Rents in Stockton/Modesto, one of the submarkets considered a beneficiary of the pandemic, saw their effective rents increase by 7.6 percent. The submarket also saw its occupancy increase to 99 percent. Sacramento saw similar success, with effective rents increasing 5.7 percent.

Fundamentals across the board were impacted by regional supply and demand imbalances, in which for the first time—in quite a while—supply greatly outpaced supply. Colliers described a “glut” of 14,000 new apartment units that came online during 2020, compared to -4,000 units of demand, or the net number of units occupied. San Francisco recorded -8,136 units of demand and had 2,000 units delivered. The San Francisco Peninsula and Silicon Valley submarkets recorded negative demand of 872 units and 237 units, respectively. Positive annual demand was seen in more suburban markets: Sacramento recorded 2,540 units of demand and the Eastbay saw 972 units of demand, while the North Bay saw 739 units of demand and Stockton/Modesto recorded 944 units.

As a result, while multifamily continued to be one of the top asset classes for investors, but still faced headwinds throughout the last year. Northern California’s apartment sales volume totaled $7.27 billion in 2020, a 31 percent decline year-over-year. Prices per unit also decreased 9.1 percent, on average, across the region. While the second and third quarters of 2020 were slow, the fourth quarter was robust, with volumes above 2017 and 2018 totals, notes Colliers. Cap rates remained stable, and interest rates lowered, with some investors procuring 10-year fixed debt close to 2.5 percent.

“There is no doubt that a tremendous amount of capital is pursuing stabilized multifamily right now,” said Wagner. “…Multifamily and industrial have fared far better than their other commercial real estate counterparts.”

As populations migrate towards suburban markets, so are investors. While traditionally some of these markets may have not attracted investor interest, factors such as increased demand for garden-style apartment product, larger units, and economic viability of multifamily product—supported by the increase in demand—have investors expanding their horizons. 

“Investors are voting with their dollars right now,” said Wagner. “We’ve seen cap rate compression in some of these truly tertiary Bay Area markets…and what that suggests to me at least, is that investors believe this work from home or this partial work from home hybrid model is going to be around for a while.”

A number of significant sales made their market on secondary and tertiary markets. In Oakland/Berkeley, the Redwood Gardens Apartments traded for $72.1 million. In Marin, further North, the View at Marin sold for $106 million. The Luxe Ripon, over in East Stockton also sold for a health price tag of $49.8 million, and The Press at Midtown Quarter in Central Sacramento sold for $118 million.  The transactions are just a few of a number of mid- to large-size deals that have closed in recent months.

As 2021 continues, capital is expected to continue to chase multifamily assets, and competition for properties will remain. Geraldo added, “Supply and ability of institutionalized assets…are hard to come by. And so, because of limited opportunities out there, I think we’ll continue to see multiple bidders on most assets that are for sale.”

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