Experts: Bay Area Apartment Demand Growing
Submitted June 10, 2010, 1:08 AM
Bay Area apartment markets are surging forward, sending signals subtle and strong that the regional economy is regaining its legs and prepared for an upturn.
San Francisco, San Jose and Oakland multifamily property owners will see modest revenue growth this year followed by stronger growth in 2011 and 2012, according to projections from apartment-market intelligence firm MPF Research in Carrollton, Texas.
“As we look at our outlook for the nation, some think there will be double-digit rental growth in 2011 and 2012. We don’t think that will happen, but if it does, we expect to see it in San Jose, San Francisco and Oakland less likely,” said Greg Willett, head of research and analysis at MPF.
“If you look at occupancy at a granular level, one bedroom occupancy is up significantly. It is a confidence vote in the economy; people are un-doubling,” said Al Pace, chief executive officer for Palo Alto-based multifamily landlord Pacific Property Co. The company’s Northern California portfolio of units was 96 percent occupied as of June 7, Pace said. “I consider it a balanced market, and shortly, perhaps, one where there is landlord pricing-power.”
Pace and Willett were two of more than a dozen speakers gathered June 9 for the 2010 Multifamily Trends conference in San Francisco’s Moscone Center. The event, sponsored by the Urban Land Institute San Francisco, PCBC and Marcus & Millichap Investment Services, drew developers, property owners, bankers and others interested in the future fortunes of the Pacific Coast apartment markets.
San Francisco finished the first quarter with nearly 96 percent occupancy, Willett said. MPF projects 2 percent revenue growth in the market this year, followed by 4 percent next year and as much as 8 percent growth in 2012, he said. San Jose’s revenue growth is expected to be comparable, edging up 3 percent this year, followed by a 5 percent jump in 2011 and a 7 percent rise the year after. San Jose ended the first quarter with an occupancy rate of 96.5 percent.
Oakland, meanwhile, is the least robust, though still growing, Willett said. Occupancy at the end of March was 95.5 percent. Revenue growth is projected at 2 percent this year, 3 percent next year and 6 percent in 2012.
San Francisco’s South of Market district, while not seeing meaningful new construction now could on relatively short notice, Willett added, based on a healthy pipeline of proposed projects in planning. “We think they could get re-initiated fairly quickly,” he said.
Speaking of the global economy in the day’s opening session, Asieh Mansour, chief economist and strategist in San Francisco for pension-fund investor RREEF, told those gathered: “There is some good news out there. Despite the sovereign-debt crisis, businesses have regained confidence, based on our surveys. They have started to rehire. That is very important.”
“Employment is turning, and for multifamily that is key,” she said.
Mansour attributed last month’s paltry 41,000 new private-sector jobs to normal economic patterns. “When you are at the bottom, some months you get good data and some months not,” she said.
The economist projected job growth across multiple sectors, including heath care services, education, trade and infrastructure-related construction. “There is global pent-up demand for high tech,” she said. “A number-one export of the United States is financial products, and they are already coming back.”
Despite some optimistic indications, Mansour warned that not all indications were good. One area of concern is that small businesses still do not have access to credit, she said. “Small businesses are the backbone of the economy.”
Another concern and “huge risk” facing the U.S. economy is the loss of global influence because of the country’s burgeoning debt, coupled with questions about the political will to address it. “Higher taxes to be sure are in our future,” she said. The country should consider Greece’s public debt problems a warning, she said. “Greece is where we do not want to be.”
Mansour predicted a modest economic recovery this year, noting that recoveries after financial crises are “less robust and more fragile.”
Ronald Johnsey, president of apartment-market forecaster Axiometrics Inc., echoed the optimism surrounding the San Jose market. Data gathered by his company in the first four months of the year show rents rising 14.5 percent on an annualized basis. “It is on fire,” he said. The South Bay region has a history of rent spikes with even modest job growth, he said.
Based on demographics, the next decade should be kind to the multifamily-sector overall, he said, as the “echo boomers,” the 70 million offspring of the 80 million Baby Boomers, mature and enter their apartment-renting years.
Given robust projected household formation rates, paltry rates of new construction permitting in the sector and the time lag in getting projects permitted, “it could create a window of opportunity where you could have hyper rental-growth rates,” he said.
He, too, however, expressed worry about downside risks, noting that state and local governments likely have more layoffs in front of them.
