Multifamily Investor Demand Far Outweighs Supply

PALO ALTO, CA—Levin Johnston, part of Marcus & Millichap's Palo Alto office, wrapped up fourth quarter 2017 with an additional 17 multifamily transactions. These transactions totaled more than 610 units and $238 million, bringing the group's total for 2017 to 48 transactions valued at more than $600 million.

Adam Levin, senior managing director, and Robert Johnston, senior vice president, recently discussed the Bay Area multifamily market, regional trends, market pressures and other insights in this exclusive.

GlobeSt.com: At this point in the market cycle, where can investors still find value in the Bay Area?

Levin: We continue to find great value in under-managed assets throughout the Bay Area. Mountain View, in particular, remains a location where we continue to uncover investment opportunities. Many investors have seemingly been scared off by Measure V, a rent control measure first passed in 2016. However, because Google is headquartered in Mountain View, there remains an increasing demand for housing and extremely strong employment fundamentals, making this market a viable option for investment.

Johnston: One important item to note is that, even though value-add opportunities exist, they can be challenging to find based on how active the Bay Area has been over the past 24 months.

GlobeSt.com: What regional trends have you observed in the market in 2017? Are these trends likely to continue through 2018?

Levin: In 2017 we noticed that many buyers continued to perform high-quality upgrades and highly amenitize their new acquisitions. For example, many 1960s-vintage Bay Area assets were updated with in-unit washer and dryers to meet tenant demand. These trends will continue in 2018, but investors will likely become more cautious in their per-unit capital expenditures.

Johnston: We also observed an increase in demand for transit-oriented multifamily units. With so many large tech companies nearby, we are seeing an influx of tenants positioning themselves near Caltrain and BART stations, further driving rental growth in these locations. We expect to see this trend continue into 2018.

GlobeSt.com: What pressures exist in the market and how can investors mitigate them?

Levin: Interest rates continue to climb, creating more cap rate sensitivity for investors. Additionally, the amount of new product that has and will be coming online has created greater competition. We believe that construction growth is just starting to pick up in the East Bay markets. With development remaining elevated, investors need to be certain they have enough knowledge regarding new product and interest rate impact to ensure their investments are strong and secure.

GlobeSt.com: What are your projections for Bay Area multifamily investment in 2018?

Levin: We project that the multifamily market will continue to be a strong investment, as the principal fundamentals remain: investor demand far outweighs the supply of available properties for sale. Well-located assets will continue to generate investor interest and multiple offers, providing that these assets are properly priced. The fact is, a concrete multifamily investment can still far outweigh alternative investment options. People always need a place to live, and the Bay Area remains one of the world's premier destinations to live and work.

Johnston: Further, the affordability gap continues to widen between owning and renting in the Bay Area, resulting in strong rental demand. We expect to see this gap continue to expand, making multifamily investments an attractive choice for investors.