South Bay’s Apartment and Condo Tsunami

By Rob Goszkowski

There is a bulge in the pipeline of South Bay multifamily unit inventory, particularly San Jose, and it has only begun to arrive. Those companies that were flush or fortunate enough to find financing when little was available are completing their projects in the midst of immense demand. And yet those developers that are in the earliest stages of multifamily projects today are confident that their efforts will be rewarded even as the crush of new inventory hits the market.

San Jose condo The Registry real estate“San Jose is very similar to San Francisco. We have a market where there is a tremendous amount for development under way,” said Paul Zeger, president of Polaris Pacific, a West Coast real estate sales and marketing firm that specializes in market intelligence. “The demand for housing is huge. By most standards, it is something most people expect to grow over five to 10 years.”

While San Francisco’s rental rates have grabbed headlines, many developers across the U.S. have set their eyes on the South Bay. “They are two different propositions,” said Steve Seligman, Vice President & Regional Manager at Marcus & Millichap. “There’s a lot of debate about San Francisco versus Silicon Valley. Where do people want to be? Are younger companies moving to S.F. or luring talent away from S.F.”

How hot is Silicon Valley’s rental market? According to a Bay Area real estate report examining occupancy and rental trends by MPF Research, rental rates increased by 5 percent in the second quarter. Meanwhile, Polaris Pacific’s data shows an increase of 21.4 percent year over year.

MPF has determined that the Bay Area’s high overall rental occupancy (97 percent) is slightly higher in San Jose, where it is 97.1 percent. Rent is averaging over $2,000 while the rent per square foot is $2.326. Both of those figures are slightly lower than the overall Bay Area, which is boosted by San Francisco’s extraordinarily high rates.

“Look at what’s driving it: jobs,” Zeger said. “What’s happened is job growth driven by venture capital investment in Silicon Valley and that has driven need for housing.” The economic and job market recovery is at full strength, but the lag to accommodate all those employees is significant. San Jose’s quarterly demand, according to MPF, is 1,587 units while the supply is less than half that figure at 723 units.

“In 2008 nobody would build anything. Then in 2009, banks looked for the best places to loan. The South Bay has strength, and so everyone rushed to buy land,” Zeger noted.

Seligman suggested that the housing shortage goes further back than the recent economic downturn. “A lot of the building boom being perceived is five to six years worth of pipeline,” he explained. “A panelist at recent event said one of the reasons for the multifamily boom, among the underlying fundamentals of why it is a bright spot where capital from all over the world wants to invest, is that a lot people were pondering larger deals in 2005 to 2010 but not much got built.”

With an existing backlog of construction that predates even the downturn, there is a lot of work to be done in a choice market. “The product tends to take in the neighborhood of one-to-two years for city approval, another year or so to build, so now it is a three-year horizon from right circumstances to completion,” Zeger said. There is now support for multifamily units where there previously was not, according to a recent Allen Matkins/UCLA Anderson forecast report on multifamily residential construction. “One of the major sea changes in the past five years has been the radical shift on the part of the government from opposing higher densities to encouraging it,” the authors noted.

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