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May. 8, 2014

White-Hot Tech Sector and Highest Construction Pace in Years Propel San Francisco’s Strong Rental Market

By Alex Girda, Associate Editor

San Francisco—Welcome to the land where technology is king. There would probably not even be a conversation regarding apartment market strength and resident appeal in The City by the Bay were it not for the booming technology sector. Embraced as the largest bastion of innovation and tech, the San Francisco Bay Area has seen its profile shoot through the roof in recent years, due to the increased activity of companies that have chosen to call Northern California their home.

In terms of the city’s job market, payroll figures have rebounded, with current numbers sitting 9 percent higher than pre-recession figures, the latest Marcus & Millichap Real Estate Investment Services San Francisco Apartment Research report shows. However, payroll is still lower than the high point of the dot-com boom days of 2000, also by 9 percent.

sanfran employmentWith other companies looking to lock down office space in the city while it’s white hot, that figure is set to go up even higher. Job market activity will tighten up the apartment market even more in 2014, with approximately 29,000 new jobs set to be created this year, improving 2013’s number of 24,200 new hires, a year-over-year growth of 2.8 percent in employment for the city. These improvements in the job market have taken San Francisco’s NAI Rank for 2014 to second place, up one spot from last year’s position.

sanfran effective rentThe apartment rental market is currently on a high in San Francisco with average rent rates clocking in at approximately 16 percent higher values than during the dot-com bubble. According to Marcus & Millichap, apartment owners will continue to see growth as tech employees prefer life in the city as long as they benefit from the privilege of private bus routes, a service that only recently came under fire from local groups, ensuring their transportation to the campuses. Apple, Google, Facebook, Twitter, Salesforce and others have created a groundswell in the city that is driving demand for not just Class A office facilities, but more living space.

The city is experiencing a frantic pace of development in the multifamily sector, with 2013 and 2014 set to add the largest amount of housing stock that San Francisco has seen in decades. Currently, 2011 stands as the low point of completions for the past five years, with 2014 set to experience a slight rise in vacancy due to the huge amounts of new units coming online during 2013 and 2014.

sanfran completion and vacancyThe vacancy rate will hit 4.1 percent, a 40-basis point decline that reverts values to 2012 levels A total of 3,400 units were completed in 2013, with 2014’s tally set to end up around the 2,800-unit mark, the Marcus & Millichap report shows. Just recently, one of SoMa’s most intriguing rental projects announced leasing is underway, with Tower Two at the One Rincon Hill luxury residential project adding 298 upscale rental apartment units to the city’s stock.

Marcus & Millichap is forecasting that rent growth for the year will drop below the average trend recorded for the United States, to around 2 percent. San Francisco ended 2013 on effective rents of $2,540 per month. Although the cost of living in the city is extremely high, San Francisco recently came in fourth place on NerdWallett.com’s ranking of Best Cities for Recent College Graduates, behind only Washington, D.C.; Seattle; and Minneapolis. The reasoning behind the rank was explained through current median earnings in the city for those with a Bachelor’s degree, the highest of the top ten cities figuring on the list.

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