Financial markets worldwide have seen dramatic volatility in this past 12 months. The Bay Area economy and new hiring have cooled, while the San Francisco housing and condo markets have started to normalize after four feverishly overheated years. We are hearing about a big jump in apartment vacancy rates, with more apartments for rent than we’ve seen in many years just as rental rates begin to decline from recent all-time peaks. As would be expected, preliminary indicators show a transition to a cooler market when it comes to apartment building sales activity. However, as illustrated in the charts below, we haven’t seen any significant changes in the statistics. The second half of 2016 will undoubtedly provide more insight regarding the speed and scale of any market condition changes.
Stephen Pugh, Paragon Commercial Brokerage
San Francisco multifamily assets that contained more than five units experienced a plateau in cap rates year over year between 2015 and 2016. However, this same product experienced an increase in dollars per square foot, price per unit and average sale prices.
The politics of new home development in San Francisco are not for the weak of heart. There are vocal disagreements between neighborhood and homeowner associations, developers, affordable housing advocates, tenant’s rights groups, business groups, and pro-, slow- or no-growth advocates regarding how developments should best proceed (or not proceed). The battles are non-stop in every political and/or legal venue available.
There has been a significant cooling in development site sales since the beginning of the year. Sites offered to the market without entitlements or permits in place and shovel ready are the least attractive offering when it comes to a smaller developer pool. Even those sites that are ready to develop are attracting less interest from developers who feel the sting of the current political climate, as well as growing concerns for the future requirements of affordable housing requirements and overall cost.
The supply side of the equation may be shifting as well. San Francisco’s development pipeline will likely ramp up over the next 18 months, according to SocketSite. The city’s apartment vacancy rate has inched up for the second consecutive quarter, now sitting just under 5 percent, while the pace of rent increases has slowed. SocketSite also reports that the vacancy rate for East Bay apartments has dropped to a record low of just less than 3 percent. The development pipeline in the East Bay is a few years behind San Francisco’s and, as such, experts believe rents in the East Bay will continue to climb.
— By Stephen Pugh, President, Paragon Commercial Brokerage. This article first appeared in the October 2016 issue of Western Real Estate Business.