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Apartment development is ramping up across the U.S., creating significant concerns for multifamily operators in 2013 and 2014. Nevertheless, there is pent-up apartment demand. Slow but steady job creation is allowing college graduates to move out of their parents’ homes or to shed the extra roommates who assisted with living expenses. Additionally, construction averaged fewer than 70,000 rentals in the past three years, compared to 130,000 units annually prior to that span. Yet more than 100,000 apartment are expected to come on line nationwide this year alone.
While many of the Northern California apartment markets are typically high barrier-to-entry metros for developers, supply concerns are mounting in some areas. Fortunately for apartment operators in the region, a majority of this construction is occurring in the largest metro areas. Elevated populations and job creation in these metros will bolster demand and ease supply-side vacancy pressure.
Although construction activity will elevate for the foreseeable future, the biggest Northern California inventory additions will occur in 2014. About 10,000 units will come on line in the region next year.
Deliveries will be greatest in San Jose and San Francisco between 2013 and 2014 as 7,000 units and 6,700 units are delivered, respectively. The surge in completions will place upward pressure on vacancies in both markets. However, the short-term rise will be tempered by job creation.
First quarter vacancy in San Jose was 2.8 percent, while San Francisco vacancy measured a healthy 3.2 percent. Rates for both metros were below their long-term historical averages. Vacancies will likely fall further before the late-2013 ramp up in new stock.
While the pace of hiring has been uneven so far in 2013, the San Jose and San Francisco employment markets grew at the greatest rate in more than a decade during 2012. San Francisco payrolls grew by 41,600 jobs last year, a 4.3 percent gain. Meanwhile, 34,200 new hires in San Jose boosted headcounts 3.9 percent. Last year’s robust hiring will spur household formation and leasing, mitigating the effects of new supply.
Construction activity will occur in several other metros, though supply increases will be less dramatic. Vacancy in Oakland is markedly below equilibrium. About 2,400 units will be completed in the East Bay in the next two years, which is on par with historical growth.
Though Sacramento’s inventory levels remained unchanged during the past several quarters, nearly 360 units are expected by the end of 2014. Developers are once again returning to the region due to pent-up demand from a lack of new supply. Additionally, nearly 16,000 jobs have been added since the start of 2012.
Development activity is also trickling into the Central Valley. Builders have 220 units underway in Fresno, while 130 units are expected in Bakersfield. Builders are attracted to Bakersfield because of the relatively broad-based rehiring. This is combined with the area’s established and growing oil and distribution segments.
— David Delich, senior director of research for Hendricks-Berkadia