By Ramon Kochavi, First Vice President and Regional Manager, Marcus & Millichap
Winston Churchill wrote, “Those that fail to learn from history are doomed to repeat it.” Precipitated by a once-in-a-lifetime health crisis, the 2020 market shift has had an oversized effect on Northern California’s multifamily marketplace. The ongoing pandemic has the hallmarks of an event that causes people — including real estate investors — to draw overarching conclusions. Overreaction is a characteristic of most recessions, but time and time again, investors have turned away from the Bay Area only to spend the next decade watching rent growth and massive appreciation from the sideline of some secondary market.
Ramon Kochavi, First Vice President and Regional Manager, Marcus & Millichap
While some Bay Area cities experienced double-digit, year-over-year rent decreases, these reductions are likely transitory in nature.
Three factors have led to the Bay Area apartment rent growth over the past three decades:
• A limited supply of units
• A robust labor market (especially high paying jobs)
• An onerous regulatory environment.
These three trends are still present in the marketplace. While some jobs have transformed into either hybrid or fully remote positions, there is no doubt that the majority of work, especially entry level, will return to an office setting after the health crisis. Office space and city density offer a vital opportunity for the digital generation to interact in-person with their peer group. At least in the near future, young college graduates will probably continue to flock to what they perceive to be an exciting live-work environment.
The second predominant trend – the supply of new apartment inventory – has remained anemic. The nine Bay Area counties experienced a sharp decrease in both multifamily and single-family homebuilding in 2020. Total issued residential permits were down 26 percent. The slowdown on housing production — particularly of multifamily units — has exacerbated the ongoing housing shortage that began in the 1970s.
The road to hell is paved with good intentions, and so it goes with our third trend, a regulatory environment that is hostile to landlords. As one of the highest regulated housing markets with the most rigorous rent control laws in the country, Bay Area cities have chased away outside capital and made it less likely that new construction, especially workforce housing, will get built. The result is that the very laws intended to aid tenants from facing dislocation in the short run will contribute to long-run supply constraints that drive up rents.
While the Delta variant has slowed down what was shaping up to be a healthy recovery in Bay Area rents, it is safe to assume we will see double-digit rent growth — if not by the end of the year — then by early 2022. Flush with equity from years of robust appreciation, Bay Area owners are mostly content to wait out the crisis in hopes that better times are ahead. As a sign of the apartment market’s recovery, sales velocity has rebounded and is up more than 20 percent year-over-year. Meanwhile, rent concessions have abated.
For now, existing regulations, prevailing NIMBY attitudes, high construction costs, forest fires and a myriad of other factors are sure to keep a lid on supply. This should result in a perpetuation of apartment prices rising higher and higher.