Bay Area Multifamily Maintains Its Strength Amid Disruptions

Adam Levin and Robert Johnston

The Bay Area multifamily sector has reached an inflection point.

While the headwinds of high inflation, rising interest rates, tech layoffs, and the recent Silicon Valley Bank crash are concerning, savvy multifamily investors are keeping their eye on the prize. The Bay Area continues to offer strong fundamentals that prevail even in today’s environment.

Several undeniable facts about the area set the stage for ongoing positive investment outcomes for those who understand the market. As a leading multifamily brokerage team with deep expertise in the Bay Area multifamily arena, Levin Johnston has witnessed the resilience of this sector over many years. Here are the reasons we believe the market is primed for long-term growth and success despite current challenges.

The market is a talent mecca

Regardless of current employment disruption in the tech sector, the Bay Area remains an attractive destination in the fight for top talent. Although Silicon Valley has seen significant layoffs as demand curves shift post-COVID, its status as a haven for established technology firms and startups alike persists. This ensures that top young professionals—the key market for multifamily properties—will continue to be attracted to the area.

There are several reasons for this. First, Silicon Valley remains a global center for technological innovation and high caliber talent pool—endorsed by tech powerhouses like Elon Musk who is relocating his engineering headquarters to Palo Alto. The region is also among the wealthiest in the world and among the hottest for real estate. In addition, the Bay Area’s mild year-round weather and proximity to cultural attractions make it a huge draw for residents of all ages and therefore an ideal location for multifamily investment.

While the San Francisco market is currently undergoing a correction, with housing prices down around 11 percent in February after an unprecedented boom over the last three years, it is poised for a powerful rebound once the shift levels off, and wise investors will still have a stake in the game when that occurs.

Rental housing demand is robust

Despite some recent cooling in the market nationally due to post-pandemic economic trends, multifamily remains one of the strongest commercial real estate categories, especially in the Bay Area. In fact, housing demand in this region continues to rapidly outpace supply.

Additionally, although rental growth is beginning to slow nationally, Bay Area multifamily fundamentals are still strong. With the upward trajectory of Q4 2022 rental rates, vacancy, and construction deliveries and unemployment decreasing, higher rents and compressing vacancy rates are now being supported by a stable return to work of local residents.

These positive KPIs make the market a strategic long-term investment and are causing multifamily investors to continue flocking to the region.

 Bay area multifamily remains a hedge against downturns

 In times of economic uncertainty as we are experiencing, multifamily properties can serve as a key defensive strategy for real estate investors.

As other asset classes experience downturns, many investors are attracted to the comparatively stable multifamily arena, particularly in markets with tremendous potential like the Bay Area. They are also seeking skilled experts like our team, with an extensive network of trusted relationships in the market, to execute deals in the current environment.

SVB and First Republic are not the Bay Area Economy

As shocking as the rapid demise of SVB was, the predicament of this leading Bay Area bank and the teetering First Republic, these institutions represent a fraction of the total economic activity of the Bay Area. It’s true these banks were significant providers of capital to the technology sector and developed a reputation for understanding the needs of those clients. However, banking is as much a people business as it is balance sheet driven. Technology bankers will continue to serve the tech sector and larger better managed banks will eventually pick up where SVB once served.

Beyond this, real estate, especially multifamily real estate can serve as a stable asset class during times of economic uncertainty. While many banks may undergo challenges over the next several months, investors can look to real estate as a safe haven to invest capital for the long term.

Ultimately, while news about the economy is causing some players to press pause on Bay Area multifamily, the market’s outlook is bright. Those who stay the course, take advantage of prudent opportunities to enter the field now, and rely upon experienced and effective advisors to guide the way are best positioned for long-term success in this region.

 Adam Levin is executive managing director and Robert Johnston is senior managing director of Levin Johnston Group, which is part of Marcus & Millichap’s Palo Alto office.