The San Francisco apartment market is exceptionally active. It features extremely low vacancies, rapidly rising rents and tremendous demand for a very limited inventory of assets. Fueling this demand is San Francisco’s thriving technology sector and young professionals, which will maintain the metro’s stature as one of the premier rental markets in the country well into 2013. While nearby Silicon Valley lures large software and information companies, San Francisco has become the incubator for tech start-ups. More than 94,000 people in the metro area have jobs pertaining to the tech industry, which is up 10 percent from last year. Small but influential firms such as Zynga, Dropbox and Airbnb are continuously hiring young professionals in the core of the metro. These high-paid individuals prefer renting, and are waiting longer to enter the single-family home market.
Technology Industry Drives Demand for Multifamily Units
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Employment this year has been primarily driven by San Francisco’s technology industry. Major firms such as Facebook and Twitter continue to hire as their businesses evolve. By year’s end, employers will have hired a total of 29,000 workers, a 3 percent increase in total employment.
Vacancies are currently some of the lowest on record, as the tech industry flourishes. In the last 12 months, the metrowide vacancy rate fell 70 basis points to 3.1 percent. Demand for Class A units lags lower-tier rentals, but the vacancy rate remains well below the most recent five-year average of 5 percent. The Class B/C sector continues to exhibit robust demand: in the first half, the sector’s vacancy rate dropped 90 basis points to 2.3 percent. The vacancy rate for San Francisco apartments as a whole will decline 30 basis points this year to 3 percent, the lowest level since 2001.
Asking rents continue to soar, despite rent control laws in San Francisco. The average asking rent increased 4.8 percent since the second quarter of last year, to $1,918 per month. Effective rents grew 5.6 percent during the same time to reach $1,840 per month. In the Class A sector, asking rents averaged $2,289 per month, up 4.8 percent from last year. Class B/C rents advanced 5 percent in the same time frame to $1,608 per month. Limited concessions, in combination with higher occupancy, triggered a 6.3 percent jump in average revenue. By the end of 2012, asking rents will have risen 6.7 percent to $2,011 per month, while effective rents are slated to climb 7.2 percent to $1,928 per month.
Sales velocity in the metro area will remain strong this year, as current owners become motivated by low interest rates and elevated values. Buyer interest far outweighs the amount of available inventory on the market, though listings will increase going forward. Several portfolios have already traded hands this year, and individual properties in good locations are attracting multiple offers above list price. Even as lenders put reclaimed properties back on the market, aggressive bidding pushes prices to high levels. In fact, the median price rose 14 percent in the last 12 months. Value-add opportunities exist in burgeoning neighborhoods that are gentrifying such as the Tenderloin and Mission, where some redevelopment projects are under way. Cap rates for these smaller, older properties typically average near the mid-5 percent to 6-percent range, while high-end assets offer first-year returns in the mid-4 to low-5 percent region.
— Sanford Skeie, vice president investments, Marcus & Millichap Real Estate Investment Services’ San Francisco office; a director of the firm’s National Multi Housing Group
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