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Nov. 1, 2012

MARKET SNAPSHOT: Tech Industry Shores up San Francisco’s Prime Market Status

By Philip Shea, Associate Editor

Source: Marcus & Millichap

The San Francisco Bay Area remains one of the hottest multifamily markets in the country. Employment in the technology sector continues to serve as a boon for the city’s overall economic climate, with Marcus & Millichap reporting that more than 94,000 people in the metro hold positions in the industry. Additionally, tech start-ups are on the rise, indicating that local recovery from the recession is well underway.

High-paid, young individuals in this and other industries continue to prefer renting over home-buying and will likely wait much longer than previous generations to enter the housing market. As such, rents continue to soar across the metro—with few concessions being made by operators. Asking and effective rents in the third quarter of 2012 were almost even, at $1,918 and $1,840 per month—respectively.

The Class A sector saw a whopping 4.8 percent increase in rents between 2011 and 2012, with asking rents now averaging $2,289 per month. Class B/C rents advanced even further, rising 5 percent to $1,608 per month. Needless to say, these prices dwarf anything seen in most markets across the country, highlighting the continued popularity of apartments in the Bay Area and relatively high incomes of its residents.

The South Marin neighborhood has become the tightest submarket in San Francisco, with vacancy at a razor-thin 1.4 percent. Limited inventory and close proximity to downtown has made this area a prime rental market, and extreme rent hikes are expected as the local construction pipeline remains narrow.

Marcus & Millichap reports that the South of Market submarket is where most new construction is likely to take place, this due to persistent strong demand stemming from high tech employment. More than 3,600 units are currently planned for the area, which translates into a 23 percent increase in inventory.

Source: Marcus & Millichap

Metrowide vacancy over the past 12 months fell 70 basis points to 3.1 percent, this after a 120-point drop in the preceding 12 months. While Class A apartments remain expensive, Marcus & Millichap notes that this asset class continues to lag the lower-tier rentals in terms of occupancy, yet is still well below the most recent five-year average of 5 percent.

Going into the final stretch of 2012, Marcus & Millichap expects that occupancy will continue to increase, with the metrowide vacancy rate falling to 3 percent. Asking rents will likely rise 6.7 percent to $2,011 per month, while effective rents climb 7.2 percent to $1,928 per month.

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