CA Multifamily Recovery Well Under Way

(Mark Your Calendars: RealShare Apartments 2011, October 20 in Los Angeles).

SAN FRANCISCO-While the press corps clamored to see if Governor Edmund J. Brown Jr. would drop any bombshells about California’s budget crisis during his keynote address at PCBC in San Francisco last Thursday, they overlooked one positive economic driver fueling the state’s economy: the multifamily industry.

Multifamily fundamentals are expected to remain positive in the next five, seven years, even 10 years from now, said Mark Obrinsky, vice president of the National Multi housing Council, during a morning panel at the Moscone Center in downtown San Francisco. Apartment starts and completions are increasing nationwide, with a significant amount of new development occurring in major primary metros like Los Angeles. Immigrants will fuel additional renter demand in California as that population increases.

According to Stanford W. Jones, executive vice president investments with Institutional Property Advisors, there are between 22,000 and 24,000 residential units currently in the pipeline in California.

Meanwhile, US rent growth is expected to reach a healthy 5% to 6% by year’s end, and in the Bay Area apartment rents will increase 6% to 8%, said Hessam Nadji, managing director, research and advisory services at Marcus & Millichap Real Estate Investment Services.

Michael J. Schall, president and CEO of Essex Property Trust, added that rents have improved every month this year at his properties. May new lease rates in Northern California and Seattle multifamily complexes owned by the apartment REIT were in the double digits—at 10% to 15%. In Southern California, rents grew approximately 5%. “Overall, we are very bullish on rents, but there is still some exciting rent growth ahead of us and we are still early in the process.”

Geoffrey Stack, managing director and principal of the Sares-Regis Group, pointed out that “Rent growth generally is directly related to job growth. We are not getting the level of job growth we would like to see.”

One participant during the mid-morning Apartment Investment Outlook panel was skeptical about the apartment market’s ability to sustain rent growth.  “I don’t see employment growth and income growth supporting rental growth,” said Steve Steppe, executive managing director of Stockbridge Real Estate.

When Stack suggested that the market is merely experiencing a temporary blip, Steppe quipped: “Europe’s in great shape, there are no problems in Greece. We’re in a world economy. Look what’s happening, guys. The economy is running out of steam. We have slowing rent growth. There’s no job growth,” he added.

“While I concur on a macro basis, there are areas that are supply constrained markets with strong job growth,” said Jones. “The South Bay (of San Francisco) is one of those areas. Our barometer is fairly well connected to the leasing agencies in Santa Clara County, South Bay and San Francisco, and it is white hot.”

Jones compared current apartment market conditions in the South Bay to those in Silicon Valley before the dot.com bubble burst. Office vacancy, he predicted, will drop to the mid to single digits by the end of Q2. Tenants are gobbling up spaces ranging from 200,000 feet to a million square feet at a time, whether it’s Google, Facebook, start-up companies, or “old-school” tech companies like Microsoft, Motorola and HP, who are leasing that space to start new divisions.

Homebuilders are on the sideline, developing very little competing housing, so there is nominal risk on the supply side, added Schall. He expects moderate job growth, in the range of 1.2% to 1.7% in the Bay Area and Pacific Northwest this year. The tech sector continues to drive demand in these regions.

“Single-family sales—both new and existing home sales—have been in the tank since the bubble burst,” Obrinsky said. “There’s not much happening on the construction front, although there was a slight increase while the ill-conceived homebuyer tax credit was in effect, but that has since played out.”

The homeownership rate is still falling. It peaked at just over 69% and has subsequently dropped 300 basis points, he said. By the end of 2011, the homeownership rate is expected to hit 65% or lower.

“I think the next three to five years in multifamily are going to be the best ever,” predicted Constance Moore, president and CEO of BRE Properties. A number of young adults are leaving their parents’ houses and entering the rental market. As a result, occupancy rates are rising, and rents are starting to soar.