SAN FRANCISCO—Employment growth in San Francisco more than doubles the national average. Job creation will reach 45,000 placements this year, a 4.4% annual growth rate. Firms filled 45,600 positions in the previous 12-month period, advancing headcounts 4.6%.

Competition for skilled workers is boosting salaries in the technology, healthcare, professional and business services sectors, prompting household formation and rising retail sales as employees purchase necessities. The influx of people to the Bay Area has caused a shortage of apartments, which has encouraged builders to ramp up production, according to a fourth quarter multifamily report by Marcus & Millichap.

Although completions will moderate this year, activity remains historically elevated, highlighting extreme imbalances between supply and demand. The price of single-family homes ensures that many residents will be unable to afford homeownership, leading politicians to push for a 33% affordable housing component in new construction, and a ballot measure to prevent any market rate development in the Mission District.

A lack of rentals has fostered incredible effective rent growth as tenants vie for the few remaining units, which will continue this year as rents tack on a high single-digit gain. Structural impediments to homeownership, combined with low interest rates and a supply imbalance, are keeping investors active throughout the metro, according to the report. Despite the deterioration in cap rates, buyers see opportunities for additional appreciation in well-located rentals, particularly inside San Francisco and throughout San Mateo County. Trading hotspots outside the urban core included Redwood City, Burlingame and San Mateo, which offer buyers a foothold in Silicon Valley. Following robust competition for assets, cap rates slipped into the mid-4% range during the fourth quarter.

Bidding has consisted of smaller players and foreign money not bound by yield constraints, with exchange buyers most motivated to close quickly. Volatility in equity and currency markets will lead many participants to consider more stable real estate investments.

Builders are adding units at the quickest pace in more than a decade and the pace of development remains elevated on a historical basis. While a portion of the finished stock is affordable and student housing, more than 1,800 rentals were market rate, with a concentration in the downtown San Francisco and SoMa submarkets. As for outlooks, builders will complete slightly more than 3,000 units this year, down slightly from the previous year when 3,300 were delivered, a moderate decrease. Supply and demand will move closer to parity this year as a number of larger projects come to market. In terms of vacancies, robust supply increases will help put the market closer to balance this year, allowing vacancy to contract 10 basis points to 3.3%. In the preceding year, vacancy fell 10 basis points on net absorption of more than 3,400 apartments.

Jeffrey Mishkin, regional manager, Marcus & Millichap, tells “A lack of options among tenants and diminishing availability in rental housing will allow average effective rents to flourish this year, rising 8.5% to $3,039 per month, far outpacing inflation expectations during the same period. During the prior four quarters, rents climbed 12.7%.”

As a result, excellent risk adjusted returns should be achieved. Soaring effective rents and home prices have builders eager to bring multi-family projects to market, with completions for 2016 expected to reach nearly 6,000 rentals. The SoMa and South San Mateo County submarkets will receive the bulk of the new offerings.

Due to long-term job creation statistics and the high cost of single-family housing, investors will remain active in the metro for the foreseeable future. Volatility in other asset markets will encourage more focus on stable multi-family properties with upside potential, concludes the Marcus & Millichap report.

As previously reported, construction on 340 Fremont is ahead of schedule.