San Francisco is not immune to the forces of gravity, but sometimes it appears that might be true for the city's apartment market. Across the country, the multifamily sector has weathered the Great Recession better than other asset classes. Availability of capital — both equity and debt — has resulted in relatively modest value declines compared to office, industrial and retail investments.
Transaction volume has been relatively robust, largely attributable to the disassembly and re-sale of the former Lembi portfolio. Research indicates that in excess of 50 apartment sales were completed in the first half of 2010, for a total value representing about $120 million. Among the most active buyers were Flynn Investments, Klingbeil Capital Management and Tribeca Cos. Expect market activity to remain level or even increase, as buyer appetite has yet to be satisfied.
The rental market also seems to have stabilized. According to Novato, California-based RealFacts, a national leader in apartment industry research, rents in San Francisco are only down modestly since second quarter of 2009, but they are up slightly in the first half of 2010. While occupancy is reported to be at a relatively low 94 percent, we believe this state may be a temporary condition as new condos have been recently added to the rental stock. However, as jobs return, so will tighter vacancies and higher rents. Talk in the market is that more jobs are coming soon to San Francisco. Reliable sources report that major employers with large office space requirements are active in the market. Given attractive historical lease rates and a large amount of space, there is room to accommodate new employment quickly.
Entitlement activity is at a low due to currently unfavorable conditions for new construction. The city's development pipeline shows approximately 1,300 residential units under construction, more than 6,000 in some stage of the building permit process, and still another 8,000 approved by the planning department. Construction activity is poised to return quickly once market demand is evidenced by quicker absorption.
— Richard Knutson is a senior vice president for C&C Apartment Advisors in Cornish & Carey Commercial’s Oakland, Calif., office.