SAN FRANCISCO—The San Francisco apartment market is among the strongest in the nation after a third-quarter surge in occupancy and rents lifted the metro out of a year of relatively mediocre performance. That is according to a recent report from Marcus & Millichap.
“Apartment operators are taking full advantage of sub-3% vacancy to accelerate the pace of rent growth as payrolls expand,” says the report. “Employers shook off a weak first quarter to add more than 25,000 jobs during the past six months.”
Many of these new positions are in the South of Market/Mission submarket, where Salesforce is setting the pace in expansion, the report says. “Other companies in the area are also hiring, which supported the largest annual drop in vacancy in the metro.”
And although conditions are tight, the threat of new supply in the South of Market/Mission submarket is elevated, says the report. “Nearly 5,000 rentals are underway in the area and another 12,000 units are planned, potentially heightening competition among buildings over the next few years. Elsewhere, some less expensive submarkets, such as South San Mateo and Marin County, are benefiting from the migration of tenants seeking lower rents.”
Investors, though, remain keen on the local apartment market, though optimism is slightly softer than it was a few months ago, the report says. “Some concern about how much more rent growth can be squeezed out of the current renter pool is beginning to build. Effective rents at 2000s-vintage apartments have soared 40% in the past four years, pricing many renters out of the market.”
In addition, the report points out that thousands of units are coming out of the ground to compete for the dwindling pool of renters that can afford top-tier apartments. “Nonetheless, investors eagerly acquire class A assets when they arrive on the market. Class C properties, meanwhile, are the most sought-after units in the city.”
According to Marcus & Millichap, there are two strategies predominate for buyers targeting these buildings. “Some investors will lift rents to the market rate or replace affordable units with competitive ones. Other buyers are upgrading units to capture the significant increase in demand for class B units. Regardless of strategy, most properties in the metro sell for cap rates in the high-3% to low-4% range.”
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com, 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.
