WESTERN SNAPSHOT, JUNE 2005

San Jose, California, Multifamily Market

Investor interest in the San Jose multifamily market remains solid as economic gains materialize in the region. Supported by employment growth and soaring single-family home prices, occupancies will continue to firm up this year. Development is slowing as builders shift their focus to for-sale condos, but the pipeline of planned apartment projects continues to grow. Private investors have asserted their confidence in the local apartment market, driving transaction volume higher, while large institutions are clearly putting San Jose on their lists as a market to watch and are closing high-dollar assets at a robust pace.

Employment growth should help bolster the market. San Jose employers are on track to add 15,500 jobs in 2005, a 1.8 percent increase. The dormant IT sector is once again posting gains and is currently recording a 7 percent expansion from a year ago. San Jose is also seeing strong growth in technology firms and anticipated increases in venture capital outlays, which should lift occupancies with the expected addition of several thousand jobs. In addition, home prices are continuing to climb as mortgage rates remain low. The median single-family home price in Santa Clara County has risen 18 percent from 1 year ago to more than $733,000.

Developers are on track to complete 1,400 apartment units in 2005. Expected completions this year represent the smallest number of completions in the region in more than 6 years. The majority of apartment construction in the region continues to take place in the city of San Jose, where 60 percent of the completions for last year occurred. Rising single-family home prices have prompted developers to start several condominium projects, the largest of which is the 238-unit Midtown Plaza in San Jose. Currently, there are more than 1,200 condominium units slated for completion this year, a 200 percent increase over last year’s deliveries.

San Jose vacancy is continuing to decrease in 2005 and is on track to post a 40-basis-point improvement by year’s end to 6.1 percent, after recording a similar gain in 2004. During the first months of the year, the greatest decreases in vacancy were posted in the higher-end Palo Alto submarket, bolstered by a growing population of residents who cannot afford the area’s high-priced single-family homes. Vacancy in the area is currently down 140 basis points from the end of last year. The Milpitas submarket is also improving with vacancy currently down 80 basis points over year-end 2004.

Asking rents are on track to climb 1 percent this year to $1,325 per month after falling each of the past 4 years from a high of nearly $1,900 per month. The desirable Palo Alto submarket continues to lead the way with rents climbing 5.2 percent over the past 12 months to a region-high $1,814 per month. Rents are continuing to fall in Gilroy as owners grapple with rising vacancies. The average asking rent there has fallen 11.2 percent in the past 12 months to $1,120 per month. Regionwide, effective rents are on course to climb 1.3 percent this year to $1,247 per month as owners trim concessions for the first time in 4 years.

Investor activity for San Jose apartments has maintained a solid pace so far in 2005 and is on track to meet or exceed last year’s level. Dollar volume for the past 12 months is up nearly 64 percent from the previous period, while transaction volume jumped 50 percent during the same time. Per-unit prices are also climbing, with the median currently at almost $140,000, up more than 5 percent from the end of 2004. So far this year, activity has been brisk, with several high-profile and pricey transactions taking place. For example, AvalonBay Communities Inc. sold the Avalon Sunnyvale, a 220-unit community, for $45 million during the last week of March. Private investors also remain active, making up nearly 90 percent of total transaction volume. Most smaller investors are focusing on assets under 20 units in areas of San Jose where the median price is often below $130,000 per unit.

Steven Seligman is the regional manager of Marcus & Millichap’s Palo Alto office.

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