Nooshi Naderi | The Apartment Building Market of the San Francisco Bay Area
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The Apartment Building Market of the San Francisco Bay Area

Posted by NooshiAdmin in Blog 17 Apr 2015

Q1 Report, April 2015

Paragon Commercial Brokerage

Two factors underlay the Bay Area real estate market: population growth driven by a soaring increase in well-paying jobs and the deeply inadequate supply of housing to meet surging demand. Developers are rushing in to build new housing, including thousands of new apartment units – the 1st phase of the huge Park Merced project is expected to finally get started in 2015 – but it takes 4-5 years on average to go from initial plan submittal to project completion in San Francisco. And the great majority of new housing planned or under construction is at the (very) high-end, so the desperate shortage of affordable housing is expected to persist.

It will be interesting to see if and when the current boom in new housing construction can catch up with our continuing boom in employment. On current trends, it’s difficult to see a significant softening in the sale or rental markets in the next year or two.

Bay Area Apartment Building Values

The Bay Area, especially San Francisco itself, is a boutique market, dominated by sales of smaller, older buildings. The highest median sales price and price per unit are still found in the city’s highly prestigious Pacific Heights-Marina district. The bigger buildings of the Downtown-Tenderloin area are second in median price but substantially lower on a dollar per square foot or price per unit basis. Values in Oakland are rising but still far below the city’s; cap rates there are declining but still far above San Francisco’s.

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Appreciation Trends: San Francisco & Alameda Counties

On both sides of the bay, prices continued to appreciate over the past 15 months. The Q1 2015 San Francisco figure doesn’t signify a sudden, big jump in the new year: Values rose steadily over the course of 2014 and continued to rise in 2015. Data from a single quarter should be considered tentative until substantiated over a longer period: Long-term trends are always more meaningful than short-term fluctuations.

Q1-15_Investment-AvgDolSqFt_SF-Alameda

Bay Area Residential Rental Market

According to RealFacts, rents continue to tick up. San Francisco has seen 13% year-over-year appreciation in average asking rent, though increases have slowed in the past 2 quarters. Oakland’s rents have continued to rise briskly: The East Bay city experienced an incredible 22% year-over-year increase. San Francisco has the highest rents in the nation, significantly higher than NYC. Not shown on the national chart below, but according to Zumper, a real estate website, Oakland is tied for 4th place (with Washington DC), and San Jose is right below them.

Rents_by-City_CAR

Q1-2015_Bay-Area-Rent-Survey

Q4-14_Units-and-Vacancy-Rates_by-Submarket

San Francisco Market Activity

In the 3rd quarter of 2014, the SF market for apartment buildings ground to a sudden halt because of fears regarding how Prop G might affect its future. When Prop G failed at the ballot box, sales surged dramatically in the 4th quarter. Then activity slowed way down again in the 1st quarter of 2015: Listings for sale, new listings and listings accepting offers all dropped to their lowest numbers in over 3 years. Since economic factors on the ground haven’t changed significantly, our assumption is that this simply reflects an unusually busy preceding quarter or is simply one of those anomalous fluctuations markets are prone to. Historically, the spring selling season is often the most active of the year, so we’ll soon have more data.

Invest_FS-New_UC_by-Qtr

1st Quarter 2015
San Francisco Apartment Building Sales

Q1-2015_SF-Apt-Bldg-Sales_A

Q1-2015_SF-Apt-Bldg-Sales_B

In real estate, the devil’s always in the details – exact location, condition, tenant profile, unit mix, upside potential, expense ratio, and so on. This list of sales only conveys a few broad statistical indicators of dozens of buildings of widely different qualities. Please call or email if you’d like more details on any of the above sales, or information on properties currently available to purchase.

Employment Growth vs. New Home Construction

The first chart below reflects the fact that the Bay Area has the strongest jobs market in the country. The growth in employment has been incredible over the past few years and the help-wanted sections are still packed with well-paid, unfilled positions. According to the SF Business Times, in March there were 8600 unfilled software engineer positions in the city listed on one recruitment site – and these jobs typically start at over $100,000 before adding signing bonuses, stock options and so on. People are pouring in and they need someplace to live.

This leads us to the second chart below from the CA Legislative Analyst’s Office illustrating how poorly the Bay Area has performed in the 30 years to 2010 at adding new housing. As mentioned before, there is a new housing construction boom underway in the city: 3500 net new units of all types (sale, rental, affordable, social project) were added in 2014, a huge jump from the previous 5 years, and tens of thousands more are in the pipeline (though many of these are in huge projects that may take decades to complete, or may not be built if economic conditions change).

Bay-Area_Increase_in_Employment

3-15_LAO-CA_Built-vs-Needed_1980-2000

This next chart from the SF Planning Department’s 2014 Housing Inventory Report (published in April 2015) illustrates the ebb and flow of new construction in the city.

4-15_Planning-Dept_Units-Added_1995-2014

Era of Construction & Rent Rates

The Bay Area and San Francisco in particular is packed with older apartment buildings. Generally speaking, the newer the construction, the higher the rents, though the older, gracious apartment buildings found in many of San Francisco’s best neighborhoods command rents as high as virtually anyplace. Almost all of San Francisco’s buildings are under rent control. However, newer buildings are now typically being built to high-tech, ultra-luxury-amenity standards with commensurately high rental rates: These are not under rent control and are a major factor in the big appreciation in average asking rents.

One question that arises is how much ultra-luxury apartment inventory can be absorbed by the market. Right now, demand is higher than supply, but one can speculate that a saturation point might be reached for such high-priced apartments as more and more new projects come on line. Is there an inexhaustible supply of young professionals who can and will pay $38,000 per year to rent a 500 square foot studio or $55,000 to rent a 900 square foot 1-bedroom apartment? Time will tell.

In these charts San Francisco, Marin and San Mateo counties are combined into 1 metro area, and Alameda and Contra Costa counties are combined into another.

4-15_Apt-Unit-Inventory_by-Era-Construction Q4-15_Asking-Rent_by-Era-of-Construction