Tag: rents

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Bay Area Apartment Market Report – Paragon Commercial Brokerage

The San Francisco Bay Area Apartment Building Market

The Paragon Commercial Brokerage – Reis Reports
2nd Quarter 2013 Market Update

“Welcome to what is arguably one of the worst cities in America to be a renter, but among the best to be a landlord and apartment investor. San Francisco led the top-50 U.S. metropolitan areas in average rent growth during the second quarter, jumping 7.8% to $2498, while Oakland was No. 2 and San Jose was in fifth place. The rent increases have investors rushing to purchase existing properties.”

The Wall Street Journal, July 17, 2013, “Bay Area Rally Sends Rents Soaring”

The West Bay area of metro San Francisco (SF, Marin and San Mateo counties) continued to boom through 2012 and into 2013, even as it became increasingly expensive. The 136,980-unit market-rate investment grade San Francisco apartment market has rock bottom vacancy and high rents. While the pace of population growth is not high in the densely developed and expensive West Bay, it is still solidly positive at an estimated 9,770 in 2012 and a forecast 11,270 in 2013. Even higher increases are predicted for later years by Moody’s Economy.com. It seems people will pay any price to live in San Francisco, as long as a growing number of advanced, high paying jobs are available.

The East Bay apartment market (Alameda & Contra Costa Counties) also tightened further in early 2013, although rent gains remained more moderate.

The Bay Area has a long history of boom and bust dating back to the Gold Rush of 1849 and continuing through the dot-com bubble and bust little more than a decade ago. When the previous tech boom ended, not only did the number of jobs plunge but so did the population. Moody’s Economy.com does not expect a repeat. Instead, employment is forecast to keep growing at a somewhat slower pace, surpassing the 2000 employment peak some time in 2015. Reis predicts a leveling off of the current strong conditions in the apartment market, rather than a frenzy followed by a collapse. The well timed arrival of new supply will keep rent gains in check, while pent up demand will ensure the units are absorbed, barring an unexpected economic shock from outside the Bay Area.

The first three charts below pertain to San Francisco County alone and then only those listings and sales reported to MLS. The specific numbers should be considered approximate, but the trend lines apply to and illustrate the overall Bay Area market: low supply + high demand = higher prices.

1Supply
The supply of investment properties available to purchase as listed by SF MLS has dropped by over 50% over the past 3 years.

2Demand
While supply has plunged, demand has soared as measured by this statistic, percentage of listings accepting offers.

3Appreciation
The supply and demand dynamic, super-charged by improving economic conditions, rapidly rising rents and extremely low interest rates, has led to a rapidly appreciating market. This chart tracks average dollar per square foot values.

In the analyses below, the San Francisco Metro Area is comprised of San Francisco, San Mateo and Marin counties, while the Oakland-East Bay Metro Area consists of Alameda and Contra Costa counties. When mixing many buildings of very different size, quality and location, all the statistics should be considered very generalized and approximate. The county of San Francisco itself typically has significantly higher rents and values than the other counties.

SAN FRANCISCO METRO AREA RENTS & VACANCY

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OAKLAND-EAST BAY METRO AREA

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SALES ACTIVITY

In the West-Bay SF Metro Area, the Civic Center/Downtown submarket led the rest in units sold over the past four quarters at 1,370, and dollar value of sales at $266 million. Among submarkets with substantial sales price per unit, Marina/Pacific Heights leads in price per unit at $478,442. Generally speaking, as the market appreciates, Gross Rent Multiples are heading higher and Cap Rates lower.

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OAKLAND-EAST BAY METRO AREA

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NEW CONSTRUCTION

For the 3-county, west SF Metro Area, 2,300 apartment units are expected to complete construction in 2013, followed by 3,600 in 2014. The three years to follow are expected to see less new supply, but still more than 1,000 units completed in each year. Whatever number of apartments is built, however, Reis expects net absorption to match it as pent up demand is met. The only question is at what rent level.

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In Alameda and Contra Costa counties, apartment developers are re-starting projects shelved during the recession, and the under construction total has risen to about 1,760 market-rate units. There are also 1,226 subsidized and senior housing units under construction. Relatively few units, however, are expected to complete construction this year, allowing the vacancy rate to fall to a low point of 2.5% at year-end.

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SELECTED SUBMARKET SNAPSHOTS

The 15,771-unit Civic Center/Downtown submarket has a first quarter 2013 vacancy rate of 3.5% and an average asking rent of $1,604 per month, the lowest among eleven submarkets according to Reis. The 417-unit second phase of Trinity Plaza was projected to complete construction in summer 2013. The 750-unit Crescent Heights broke ground in January 2013 for completion in April 2014.

In the 9,787-unit Russian Hill/Embarcadero submarket, the vacancy rate is 2.5%, and the average asking rent is $2,767 per month, the highest in the West Bay area according to Reis.

In the 8,084-unit Marina/Pacific Heights submarket, the first quarter vacancy rate is reported by Reis at 2.0%, the lowest in San Francisco proper, with an average asking rent at $2,368 per month. “The Marina, the tract with the highest creative class concentration in San Francisco, has a reputation for being chock-full of young former fraternity members,” according to the Atlantic Cities. “As the San Francisco Chronicle notes, ‘Today the apartment buildings, shops, and restaurants seem to be bursting at their seams with beautiful, young and fit 20- and 30-somethings.”

The 16,018-unit South of Market (SoMa) submarket has a vacancy rate of 5.0%, highest among the submarkets, and an average asking rent of $2,517 per month, the second highest market-wide. In the close vicinity of both the financial district and the high-tech, bio-tech hubs in the city, this is a very strong market. This submarket has dominated new supply recently, but while 1,032 units remain under construction here, new supply is spreading to other areas.

The 8,381-unit North Marin submarket has a vacancy rate of just 1.5%, the lowest among the submarkets, and an average asking rent of $1,608 per month, the second lowest according to Reis.

In the 14,713-unit Central San Mateo submarket, the first quarter vacancy rate is reported by Reis at 2.9%, with the average asking rent given at $2,006 per month, highest in the suburbs.

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Overheated? Yes. Bubble? No. Stabilizing? Maybe.

July 2013 San Francisco Market Report

If you prefer, you can skip the following analysis to go straight to the charts and maps following.

Many adjectives are used to describe San Francisco, but normal isn’t a common one – and the same can be said about our real estate market. Even taking into account its tendency to be unusual in one way or another, this past spring’s market was overheated by virtually any definition. Surging consumer confidence and huge buyer demand chased a deeply inadequate supply of homes for sale, abetted by interest rates so low that loans – factoring in inflation and mortgage interest deduction – were almost like free money. All this led to an extreme seller’s market, a feeding frenzy and dramatic price appreciation.

But not, in our opinion, a bubble. The Economist, one of the first to sound the alarm for the last bubble, sees no sign of a U.S. housing bubble, basing its conclusion upon historical comparisons of home prices with rents and incomes. Also, it is not unusual for the market to go somewhat crazy following a 4-5 year down cycle after all the repressed demand bursts forth – this happened in 1996-1997 too. Besides which, we are only about 18 months into the current recovery. Though real estate is susceptible to sudden economic and political shocks, in past cycles, recoveries have typically lasted at least 6-8 years before peaking. That doesn’t mean there won’t be any short-term market adjustments, up or down, for one reason or another, along the way.

There are some signs of a normalizing market. After a year of declines, the number of new listings in the 2nd quarter was a little higher than the 2nd quarter of 2012. Though this inventory was quickly gobbled up and overall supply remains very low, it’s a good sign more sellers are entering the market. Median prices may be leveling off after spring’s big pop – it’s still too soon to be sure, but summer often sees a cooling down. It’s not welcome news to buyers, but interest rates have increased from extreme lows – though remaining very low by any historical scale. (See below: The Sky is Not Falling.) The distressed home segment, which always distorts markets, is disappearing in the city and declining everywhere. And new-home construction continues to increase: even though we won’t see much of this new inventory until 2014 and later, it’s a very positive sign.

We have updated our home value maps to reflect spring’s recent sales:
San Francisco Neighborhood Values

1San Francisco Median Home Prices
For both houses and condos, the second quarter saw jumps well above previous peak values. Median sales prices are affected by other factors besides changes in value – seasonality, inventory, buyer profile, big changes in the distressed and luxury home segments – but the dramatic increases do reflect rapidly climbing home values in the city. Though all SF neighborhoods have been experiencing striking appreciation, this does not mean that all have now exceeded previous peak values.

2Sales Over & Under Asking Price
This chart illustrates the enormous percentage of listings selling for over – and sometimes far over – asking price. 25% of house sales in June sold for 20% or more above list price: At San Francisco prices, 20% above asking often equals hundreds of thousands of dollars.

Price reductions: 89% of second quarter sales sold quickly without price reductions at an overall average of 8% over list price – a clear indication of overheating. Still, not every listing sold without a price reduction and some didn’t sell at all, but ended up withdrawn from the market:
Price Reduction Chart

3San Francisco Luxury Home Sales
No market segment has been affected more dramatically by the recovery than luxury homes. In an inventory constrained environment, it has far out-performed the general market in unit sales.

This link goes to our luxury market report that also delineates the neighborhoods which dominate high-end house and condo sales in San Francisco:
Paragon Luxury Report

4Interest Rates: The Sky Is Not Falling
Not to diminish legitimate concerns regarding rising mortgage rates and their effects on housing costs, but this graph puts recent increases in context. At any time before 2011, the current interest rates, even after their recent big percentage jump, would be reason for conga lines of celebration in the streets. Rates had to rise from their historic and artificial lows – how far and fast this may continue is unknown to us, but we don’t presently expect big shocks to the real estate market in the near future.

Distressed Home Sales: this link goes to a chart illustrating the rapidly dwindling distressed home market in San Francisco. In most neighborhoods, the effect of these sales has disappeared altogether.
Distressed Home Sales

5Months Supply of Inventory (MSI)
Even with the increase in new listings in the second quarter, inventory as compared to demand remains drastically low.

Average Days on Market (DOM) have also hit historic lows for virtually every property type in the city:
Average Days on Market

7-13_Map-Unit_SalesWhat Sells Where
What district of San Francisco has more house sales than any other? Which area has far more condo sales? You may be surprised at the answers.