WESTERN SNAPSHOT, APRIL 2006

Oakland, California Multifamily Market

MacNaughton

Single-family home prices jumped 17 percent in 2005 to a median of nearly $560,000, making the difference between average rent and the average home mortgage payment in Oakland nearly $1,700 a month. This disparity and growth in employment and population appear to be mending Oakland’s rental market for the first time since 2001 when the tech bubble burst apartment fundamentals throughout the Bay Area and California.

Currently, unemployment in Oakland is 4.8 percent, and job growth is forecast to grow by nearly 2 percent for the year. New development of multifamily housing is steady, but continues to be predominantly for-sale housing. Also, the condo conversion trend continues to deplete apartment stock without much replacement. These factors, coupled with strong investor demand for yield-driven products, are boosting apartment prices and compressing rates of return.

Oakland is a rent-controlled market where rent increases are limited in all multifamily buildings built prior to 1983 based on a modified Consumer Price Index (CPI) — a 1.9 percent increase through the end of this month. Of Oakland’s rental market of approximately 88,000 units, less than 5 percent are located in communities of 50 units or more. According to the Rental Housing Association of Northern Alameda County’s (RHA) most recent rental survey of mostly apartment communities with less than 50 units, average rent for the region is up 8.5 percent to $1,030 per unit. Vacancy has decreased 2.3 percentage points to an average of 5.1 percent.

A look at communities of 50 units or more tells a slightly different story; with rents improving, but occupancy decreasing. According to Real Facts of Novato, California, rents for apartment communities of 50 units or more were up 1 percent in the fourth quarter and 1.9 percent for the year to an average of $1,294. Occupancy, however, was down 70 basis points for both quarter over quarter and the year, to an average of 94.4 percent.

The East Bay region, comprising Alameda and Contra Costa counties, represented a mixed trend. The average asking rent ended the year up 2.3 percent to $1,201 per unit, but average occupancy dipped 80 basis points for the quarter, still managing an overall year-end improvement of 60 basis points from 2004 to 94.4 percent.

On the investment front, Oakland remains an affordable choice for those wishing to purchase Bay Area apartment communities and continues to account for nearly 35 percent of all transactions in the East Bay. With continued demand though throughout the Bay Area for real estate investments, the Oakland market has seen the median price per unit increase 13.5 percent to $115,555 a unit for 2005. The average cap rate was 5.7 percent for the year, compressed nearly 100 basis points from 2004.

There were 881 multifamily transactions recorded in Oakland in 2005, totaling $631 million. Apartment communities of two to four units accounted for 87 percent of these transactions.

Seven years after Oakland Mayor Jerry Brown began pushing for the development of urban residential housing to accommodate 10,000 new residents in downtown Oakland, the goal has been met. Oakland currently has 8,642 residential units approved for development, 4,788 units under review and 2,425 units on the drawing board in pre-application. The majority of development is high-density residential and mixed-use residential infill, leaving the rental market to play catch up. It is estimated that of those 15,000 units, less than 1,000 units are specifically for-rent developments.

The most notable multifamily developments are the 100 Grand Project and the Wood Street Station in west Oakland. An Essex Property Trust project, the 100 Grand is a 241-unit complex that is similar to the developer’s successful 270-unit Lake Merritt development, which sold as a condo conversion in 2004 for $88 million or nearly $326,000 per unit. Wood Street Station is a 1,500-unit project being developed by HFH Development of Los Angeles.

Some of the nation’s top developers are working in Oakland, including Forest City, Pulte Homes, AF Evans, Signature Properties, Shorenstein Co., SNK Development, Olson Co. and, more recently, Lennar Corp. with the purchase of more than a full city block in Chinatown. Forest City’s Uptown project, a mixed-use development at the north end of downtown will include 665 residential units. The second phase of Fruitvale Village in central Oakland is in the pre-application stage and could include 447 residential units. Shorenstein has under review a 450-unit development, located across the street from City Center in downtown Oakland, and a 421-unit development on Broadway already approved. The 64-acre Oak to Ninth mixed-use project along the waterfront south of downtown is scheduled to include 3,100 residential units, 200,000 square feet of commercial space, 3,500 parking spaces and 27 acres of dedicated open space. Another major development in pre-application is the MacArthur BART (Bay Area Rapid Transit) Village, which will be one of 14 mixed-use redevelopments near BART stations.

Oakland’s advantages and market fundamentals should keep it a prominent renter’s city, but the sales market may be showing signs of slowing down. This year there have been less than a third of the average quarterly multifamily units sold in 2005.

Justin MacNaughton is a broker in the Karr | MacNaughton Apartment Group at TRI Commercial Real Estate/CORFAC International.

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