What’s fueling this nationwide trend? Both millennials and empty nesters from the baby boomer generation. While age may be the key difference between the two cohorts, the sentiment fueling the desire for multi-family housing rentals is an overall shift from traditional home ownership to modern urban renter. These groups are forsaking a larger space in the suburbs for metropolitan spaces within walking distance of highly sought after areas of employment, entertainment and interest.

In both the Bay Area and nationwide, this shift in demand is powering high-density developments with a higher return in revenue. Apartments are becoming smaller while still commanding the same amount of rent per month, so new development is seeing an increase in the amount of units per multi-family building.

Has this stemmed the tide of ever-rising rent prices in the Bay Area? Not quite.

The average asking price of rent in San Francisco ranged from $2,809 for a 500 sq.ft. studio to $4,650 for a 1,082 sq.ft. 2B/2B unit. Oakland fared slightly better at about $2,091 to $3,672, respectively. There were significant cost savings in Marin, where an average studio costs about $1,762 and a 2B/2B unit $3,184.

Year over year, 2016 saw a continuation in the increase of average asking rent rates for buildings with over fifty units (1):

  • Berkeley: 4.5%
  • Marin: 4.6% (2015 appreciation rate: 13%)
  • San Francisco: 4.7% (2015 appreciation rate: 13%)
  • San Jose: 6.3%
  • Oakland: 7.2% (2015 appreciation rate: 22%)
  • Hayward: 14.7%

(Data per Paragon Real Estate and Real Facts, LLC)

Increases in both rental rates and new construction starts in multi-family housing have both been due to the post-recession jobs recovery in the Bay Area. The recovery has been fueled in large part by the younger Generation X and tech industry. These younger generations are more likely to rent in a multi-family structure than to choose home ownership.

According to Paragon Real Estate Group, the majority of multi-family apartment buildings in San Francisco were built from 1900 to 1970, with most built before 1940. However, since 2013, there has been a revival in construction for new multi-family buildings. About 5,000 units were estimated to be completed for 2016. The average number of units typically added is less than 2,000 per year.

“For the first time in 75+ years, market-rate rental housing construction is outpacing new home construction intended for sale,” according to Paragon. “However, because of the high cost of construction, the immense hassle factor and the length of time it takes to build in San Francisco… virtually all the new market-rate apartments are at the very highest end of rental cost.”

These newly completed developments are echoing the multi-family market trends across the nation: they are luxury buildings near city centers and other areas of interest with abundant amenities. The majority of these high-end buildings in San Francisco are asking upwards of $3K a month for a studio apartment.

New construction in San Francisco is notoriously subject to a long approval and permitting process. While construction of any type is slower because of this, new construction on multi-family housing vastly outpaces single family residential builds. In 2013, construction for multi-family housing in San Francisco nearly doubled compared to 2012. (2) Multi-family construction slowed slightly in 2015, but picked up again and is expected to increase further.

What’s in store for the future? San Francisco’s economy is projected to continue to strengthen over the next few years. With no sign of the millennial generation’s appetite for rental housing decreasing, rental markets are projected to remain strong as well. While 2016 showed softening returns for investors, rental market research firm, Axiometrics, forecasts a 3.3% rent growth in 2017 and a 6% rent growth in 2018. (3)

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Sources:

http://paragon-re.com/Bay_Area_Apartment_Building_Market

http://journal.firsttuesday.us/san-francisco-housing-indicators-2/29267/

http://www.axiometrics.com/blog/the-latest-apartment-forecast

https://www.bdcnetwork.com/5-intriguing-trends-track-multifamily-housing-game