SAN FRANCISCO—The San Francisco apartmentmarket is in the midst of the largest buildingboom in decades, spurred by frenzied growth fromtechnology firms. Dozens of cranes dot the San Franciscoskyline as high-rise residential and office buildings race tocompletion. That is according to a recent report from Marcus &Millichap.

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Currently, seven residential towers eclipsing 15 stories areunder construction in San Francisco County, the firm says, and theplanning pipeline is robust, especially at the intersection ofMarket and Van Ness. “While new units should alleviate some of thepent-up demand for housing in the area, increased competition andrenter fatigue are beginning to pull rent growth back from theblistering pace set over the past four years.”

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Effective rents are already more than 25% above thepre-recession peak, and residents are challenged to scrape togethermonthly payments, the firm says. “While employment growth will helpreplace residents that fall out of the local rental market or movedown the quality ladder, operators charged with leasing largeapartment buildings will ease rate hikes in the near term to widenthe pool of top-of-the-market renters.”

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The low-yield investment climate is pricing all but the savviestbuyers out of the local apartment market. Investors are consideringthe merits of individual listings in the city rather than focusingon popular submarkets, the firm says. “This strategy helps solvetwo issues: a dearth of available properties and finding deals thatplay to investors' strengths. A value component of apartment dealsis largely relegated to an owner's ability to navigate rent-controllaws. Investors that can turn controlled units into market-rateones can realize tremendous upside. Many of these operators have alengthy history in managing the turnover process.”

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According to Marcus & Millichap, redevelopers are alsoenjoying some success in the city. “Older properties with largestudios and one-bedroom apartments that can be repositioned assmall one- and two-bedroom units will command a significant gain inrents. Nonetheless, the timeframe to recoup investment costs isextended.”

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Overall, cap rates begin in the mid-3% range for properties withupside potential in any of the popular submarkets. “First-yearreturns creep into the low-5% range in the Tenderloin.”

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Hear more on the City's apartment market at our upcomingRealShare Bay Area conference, held September 4th at theCity 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.