SAN FRANCISCO—The San Francisco apartment market is in the midst of the largest building boom in decades, spurred by frenzied growth from technology firms. Dozens of cranes dot the San Francisco skyline as high-rise residential and office buildings race to completion. That is according to a recent report from Marcus & Millichap.
Currently, seven residential towers eclipsing 15 stories are under construction in San Francisco County, the firm says, and the planning pipeline is robust, especially at the intersection of Market and Van Ness. “While new units should alleviate some of the pent-up demand for housing in the area, increased competition and renter fatigue are beginning to pull rent growth back from the blistering pace set over the past four years.”
Effective rents are already more than 25% above the pre-recession peak, and residents are challenged to scrape together monthly payments, the firm says. “While employment growth will help replace residents that fall out of the local rental market or move down the quality ladder, operators charged with leasing large apartment buildings will ease rate hikes in the near term to widen the pool of top-of-the-market renters.”
The low-yield investment climate is pricing all but the savviest buyers out of the local apartment market. Investors are considering the merits of individual listings in the city rather than focusing on popular submarkets, the firm says. “This strategy helps solve two issues: a dearth of available properties and finding deals that play to investors' strengths. A value component of apartment deals is largely relegated to an owner's ability to navigate rent-control laws. Investors that can turn controlled units into market-rate ones can realize tremendous upside. Many of these operators have a lengthy history in managing the turnover process.”
According to Marcus & Millichap, redevelopers are also enjoying some success in the city. “Older properties with large studios and one-bedroom apartments that can be repositioned as small one- and two-bedroom units will command a significant gain in rents. Nonetheless, the timeframe to recoup investment costs is extended.”
Overall, cap rates begin in the mid-3% range for properties with upside potential in any of the popular submarkets. “First-year returns creep into the low-5% range in the Tenderloin.”
Hear more on the City's apartment market at our upcoming RealShare Bay Area conference, held September 4th at the City Club in San Francisco. Click here for all the details.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
