San Francisco Bay Area
Apartment-Building Market Report
May 2014 Update by Paragon Commercial Brokerage

In this report, San Francisco Metro Area refers to San Francisco, Marin and San Mateo counties, with 138,600 existing apartment units; Oakland Metro Area refers to Alameda and Contra Costa counties, with 147,300 units.
The economy continues to improve; population and employment to increase; rents to climb; and vacancy rates to decline. According to Reis, “Residential rents continue to grow fastest in the markets with the best underlying metro-level economies. San Jose, San Francisco, Seattle and Oakland-East Bay, all markets heavily influenced by the booming technology sector, were the top four markets by effective rent growth over the past twelve months.” In the San Francisco and Oakland metro areas, gains in asking rents were recorded in all 19 submarkets, and Reis predicts further increases of 3.4% to 4.3% by year end.

A good example of the general Bay Area housing dynamic is the city of San Francisco, where the upward pressure on rents has been most ferocious. According to the latest census data, the estimated increase in the city’s population since 2010 was 32,000; over the same period, the number of employed city residents jumped by 56,000. But the number of new housing units added since 2010 was only about 4200. With an average household size of 2.3 persons, over 22,000 people have been looking for homes that don’t exist, and this is probably the biggest driver of rent and home price increases.

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San Francisco Rents
This chart graphs the median asking rent for 2-bedroom apartments in a number of San Francisco neighborhoods. It clearly illustrates the current white-hot state of the city’s rental market.

 

 

 

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Price per Unit by Submarket
As with all real estate values, price per unit varies dramatically according to location. In the city’s Pacific Heights-Marina submarket, it is approaching half a million dollars per unit, an astonishing figure.

 

 

 

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Average Dollar per Square Foot
Since the bottom of the market in 2010, average dollar per square foot values for apartment buildings have jumped 44% in the Oakland Metro Area and 51% in the San Francisco Metro Area. In the case of the latter, new peak values were reached in 2013.

 

 

 

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Vacancy Rates
The flip side of the coin of rising rents is declining vacancy rates, which are very low by any historical standard. The higher rate in SoMa probably reflects the gradual absorption of newly built units coming on market rather than any lack of demand (as this is a very hot area for high-tech workers).

 

 

 

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Cap Rates in SF & Alameda Counties
This chart compares return on investment as measured by capitalization or “cap” rate for the counties of San Francisco and Alameda (which includes Oakland). San Francisco investment properties have always commanded a high premium, which is reflected in the much lower general range of cap rates when compared to the East Bay.

 

 

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Inventory for Sale
This graph only reflects residential investment properties listed for sale in Realtor MLS systems, but it illustrates the extreme shortage of inventory on the market. When high demand meets low supply, upward pressure on prices ensues.

 

 

 

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Sales Volume
Pursuant to the extremely low level of inventory of properties available to purchase, the volume of closed sales transactions plunged in the first quarter of 2014. It typically picks up in the second quarter as new listings come on market.

 

 

 

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New Housing Construction
This is a very approximate snapshot of new-housing-unit construction in the city of San Francisco, and it includes housing of every kind – condos, rental apartments and social housing projects. Still, it illustrates the crash in construction after 2008, which explains some of our current housing shortage, and the large surge in construction currently underway. Even with the jump in building, it will be a while before new construction comes close to meeting the increased demand for housing.