WESTERN SNAPSHOT, JANUARY 2005

San Francisco Multifamily Market

Mishkin

San Francisco employers are expected to add jobs this year for the first time since 2000, which should boost rental demand for local apartments. The region’s investment market has held up to numerous challenges in the past few years, and transaction velocity is expected to meet or exceed levels reported last year. Multifamily vacancy, though well above levels recorded a few years ago, is below the national average, and construction activity continues at a slow pace, factors that will benefit owners in the coming years.

Development activity for 2004 was modest, and in 2005 only 1,000 new units are expected to come online, a 30 percent reduction. However, this development activity will still serve to temper gains in tenant demand. Renewed interest in high-rise housing developments has resulted in several condo and rental projects planned for the city. The 1177 Market Street project, which would comprise more than 1,400 rental units, is perhaps the most significant of the proposed apartment communities.

Vacancy in San Francisco, while still higher than most property owners are accustomed to, remained high in 2004. Relatively high vacancies of 6 to 7 percent are still less than the national average though. Rates are expected to hold steady in 2005 with improvements following more substantial job growth.

San Francisco rents have fallen almost 30 percent since 2000, although they remain 50 percent above the national average. Although some property owners continued to adjust rents downward and offer modest concessions through 2004, rents at most properties have stabilized along with occupancies. In 2005, owners are expected to trim concessions, perhaps raising effective rents by 1 percent, to a monthly average of $1,543.

Despite the economic challenges of the past few years, investor sentiment has remained positive for San Francisco apartment properties. After 3 years of waning sales velocity, 2004 brought increased activity to the San Francisco market. Further increases are forecasted for 2005 as investors seek to capitalize on still-favorable interest rates and a stable rental market. Strong investor demand pushed the average price per unit to more than $180,000 at year-end 2004.

The long-term positive outlook for San Francisco’s multifamily market is supported by the region’s demographics, high barriers to entry for new development and high home prices. For example, almost 25 percent of San Francisco’s population is in the 25- to 34-year-old age cohort, one of the segments most likely to rent, and nearly 60 percent of the area’s residents live in non-family households. The percentage of households in San Francisco able to afford a median-priced home stands at 12 percent.

Jeffrey Mishkin is a first vice president and serves as regional manager of Marcus & Millichap’s San Francisco office.


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