California Market Report May 2014-Additional California Markets
- Apr 17, 2014
As reported in the May edition’s California Market Report, San Francisco remains California’s top market for multifamily growth, while Los Angeles and San Diego are experiencing a slower recovery from the downturn. The state as a whole is showing improvement, albeit slow, on the development front and acquisitions of existing assets remains extremely competitive in most of the markets around the state.
In that report Michael Cohen, Director of Advisory Services at Property & Portfolio Research (PPR) told MHN that “in general most markets continue to enjoy very tight vacancies.”
“It’s going to vary by market. Certainly going to vary by demand drivers, population growth household formation, job gains and supply constraints, but I think in general, like most of the country, fundamentals are still pretty tight,” he says.
The rest of the Bay Area and Sacramento
The East Bay, mainly Oakland, has seen a long drawn out recovery. Between 2011 and 2013 the market seemed poised for some growth, but development has trickled back down and the area’s job growth was almost flat.
There is significant demand in the East Bay, which showed a change in occupancy dropped from 1.33 percent in 2012 to .40 percent in 2013. Carlos Ortega, real estate economist with PPR says that there is some spill-over demand from San Francisco, but that development is and will likely remain “subdued.”
“It’s certainly the weakest in terms of expected inventory growth over the next few years,” he says.
San Jose, which has saw the delivery of 5,053 units from 2012 to the end of 2013, remains a Bay Area hotspot for multifamily growth, with the supply beginning to ramp up in the market.
The momentum in San Jose has been very similar to San Francisco in terms of tech growth and overall jobs being stronger, Ortega says.
“Obviously we’ve seen the big players, Apple and Google really helping to drive demand along with a slew of other tech companies in the area,” he says. “It’s all really focused in the North San Jose area, in and around the Golden Triangle area where a lot of these employers are heavily expanding.”
Occupancy increased less than 1 percent year-over-year for both 2012 and 2013 and cap rates finished 2013 at 4.12 percent.
Sacramento, which differs from the Bay Area with its sprawling geography, is trending similarly as other markets as far as fundamentals are concerned, but numbers are more reflective of its suburban nature. Vacancies are at about 5 percent, which are somewhat constrained for the market, but Joseph Sollazzo, real estate economist with PPR doesn’t foresee a huge surge in supply as single family home prices are still nearly $100,000 below pre-recession prices making home ownership in the market much more attainable than in areas such as San Francisco and Los Angeles.
“That’s going drag on demand a little bit,” he says “The economy is not nearly as strong here as it is in San Francisco either. We don’t have the driver of tech like they do in San Francisco.”
Sollazzo says that the major employment driver in Sacramento is the state and local governments, which saw significant job losses during the recession, and although some of those jobs have returned, he says that the primary job growth is being seen in “back-office, low-value-add type jobs as opposed to engineering and high tech kind of stuff you’d see in San Francisco.”
The below average demand and average supply will allow for vacancies, which saw year-over-year changes of -11.79 percent in 2012 and -14.87 percent in 2013, to pick up gradually over the next year or so.
Of note, according to Sollazzo, is the potential for Sacramento to receive a new arena in its downtown area for Kings basketball games and other events. The project’s specifics are still being worked out, but it is still in the works and he says that developers are eyeing the potential for value-add urban feel communities and rehab projects in the area.
Some of the types of projects noted included a jail conversion to apartments and the possibility for office conversions as well.
“Developers are starting to get a little bit excited about the downtown and midtown area,” he says. “That’s something to keep an eye on going forward but it’s so early still in the development process.”
Outside of San Francisco, Orange County looks to be the next strongest market in the state. Cap rates jumped from 3.23 percent in 2012 to 4.41 percent in 2013 and vacancies have dropped from almost 6 percent in 2011 to 5.07 percent at the end of 2013.
“The job base has been a bit more robust in Orange County than it has been in Los Angeles,” Cohen says. Since the trough of the cycle we’ve seen about 100k created in OC that’s dropped unemployment by about 4 percentage points.”
According Cohen, layoffs are being offset by job growth in sectors such as life sciences, banking and technology, adding that Walt Disney recently added about 1,000 jobs with the expansion of Disney’s California Adventure park.
He says that the Central Orange County submarket, which is comprised of cities such as Santa Ana, Anaheim and Irvine, is where the majority of multifamily growth is happening.
“We have about a 2444 delivering in 2014 and about 3000 units delivering in 2015 and most of that supply is going to be in that submarket,” he says.
Comparatively, there were only 1,658 net completions in 2013 and Cohen says that fresh supply should increase vacancies, but slowly over time.
“While supply is supposed to pick up, we’re not expecting vacancies to increase dramatically,” he says. “It’s sort of a slow progression of 10-20 basis points per year through the middle to the end of 2018 in this market. Certainly some higher levels of supply that sort of has to be absorbed and should very slowly move up vacancy rates. Concessions I’d also note are near zero for buildings that are 50-plus units right now.”
For more information about the San Francisco, Los Angeles and San Diego Markets please refer to the May edition’s California Market report.