San Francisco and San Mateo counties boast above average employment numbers and wages and have been strong all through the current business cycle. Over the past four quarters ending in June, organizations in these counties, along with Marin County, (henceforth referred to as “the metro,”) have created 30,750 new jobs. This expansion of the metro’s labor force by 2.9 percent far exceeds the national average over the same time period. Businesses are expected to create 40,000 new positions this year and employment growth will reach 3.7 percent. Hence, the metro’s economy has created substantial demand for housing and apartments are leading the way, as the high cost of single-family homes, rigorous regulation, and the infill nature within the metro has constrained deliveries during previous years in the cycle.
Jeffrey Mishkin, Marcus & Millichap
There are multiple major projects that will boost the rate of completions significantly above previous years in the cycle. Builder activity will surge to a multi-decade high with 6,440 apartments slated for delivery, exceeding the 1,488 units brought to market in 2015. The majority of completions will target the South of Market (SoMA) and South San Mateo County submarkets.
Vacancy rate in the metro will register a 110-basis-point increase in 2016, rising to 4.5 percent by December. Vacancy fell 10 basis points last year as the heightened demand for a live-work-play lifestyle drew residents to rentals. While vacancy has ticked up meaningfully in several key submarkets, a lack of optionality among renters will continue to support outsize rises in the average effective rent. As a result, the average effective rent will climb for the seventh consecutive year. In 2016, a 6.3 percent rise in the average effective rent to $3,176 per month is expected. This nearly equals the 6.7 percent boost in the average effective rent recorded in 2015. Although, in the city of San Francisco specifically, rent has been flat for almost one year.
As real estate values have appreciated, investors of all sizes have been deploying capital into the infill San Francisco metro. Years of intense buyer interest have had a significant impact on cap rates, pushing first-year returns into the mid- to high-3 percent range, depending on asset quality and location. As a result, investors have shifted toward strategies that help mitigate higher-priced environments, focusing on value-add and repositioning opportunities to boost returns above the market average. While some of these opportunities still exist, the number of participants looking for these deals has tightened prospective returns notably. Activity in the coming months is likely to remain driven by the number of willing sellers in the market. This year, for the first time in a long time, we’ve seen price reductions and deals selling below list price.
Local Highlights
The biggest multifamily complex coming to San Francisco will have more than 400 units and is slated for delivery in December. It is being developed by Fairfield Residential. The project, known as L Seven, will contain floor-to-ceiling windows, a state-of-the-art fitness center and outdoor courtyards with ping-pong tables.
In 2017, Equity Residential and Trinity Management Services will finish their respective projects in San Francisco. Equity Residential’s 855 Brannan will contain 432 units, while Trinity Management’s Trinity Place III is expected to exceed 540 rentals. Both projects are slated for a mid-2017 delivery.
Homebuilder Lennar recently announced that it had sold out of the first 88 townhouses and condos in the 750-acre waterfront property known as Hunter’s Point. The residences are the first delivery of a $7 billion makeover that will eventually expand to include 12,000 homes along a 500,000-square-foot shopping center on the site of the former Candlestick Park, previously an outdoor sports and entertainment stadium located in San Francisco.
— By Jeffrey Mishkin, First Vice President and Regional Manager, Marcus & Millichap. This article first appeared in the October 2016 issue of Western Real Estate Business.