What San Jose Investors Are Looking for Now
Levin Johnston’s Adam Levin and Robert Johnston examine how investor sentiment and market fundamentals have changed since the onset of the pandemic.
San Jose’s multifamily market has been fueled by one of the strongest economies in the country. Thanks to its significant reliance on the tech industry, the metro is well-positioned to overcome an economic fallout. Office-using jobs account for more than half of all employment, positioning San Jose among the least affected metros by the pandemic. Nonetheless, the COVID-19 crisis has pushed residents to look for more affordable housing options, shifting buyer interest from luxury apartments toward value-add properties.
In the interview below, Levin Johnston’s Executive Managing Director Adam Levin and Senior Managing Director Robert Johnston examine the multifamily market fundamentals in San Jose and shed light on how industry players altered their strategies to successfully overcome the current economic challenges.
How would you describe San Jose’s multifamily market before the pandemic? How do you see the market now?
Levin: Like most parts of the Bay Area, San Jose was one of the strongest submarkets for multifamily investment prior to the pandemic, and it is well-positioned for recovery once the pandemic has passed. Vacancy rates still remain relatively low and as we head into the fourth quarter of the year and then 2021, we expect fundamentals to continue to improve.
It will be interesting to see how the 1,800 new units coming to the market will affect future vacancies, however, we expect fundamentals to continue to improve as employees begin to return to the workplace.
Johnston: Investors are showing increasing confidence in the multifamily sector, compared to other types of real estate products, and this is manifesting in Bay Area markets like San Jose, where occupancy is strong and the market is positioned for growth.
Which aspect of San Jose’s multifamily sector has been most affected by the health crisis? Why?
Johnston: The health and economic crisis caused by COVID-19 has affected the luxury apartment sector far more than the value-add sector in San Jose. We have seen that spacious, garden-style, Class B and C properties—where value creation is possible—have maintained some of the highest occupancies and lowest delinquencies in the region.
How has investor sentiment changed in San Jose since the coronavirus outbreak? What type of properties are buyers looking for now?
Levin: Like in most markets, some San Jose multifamily investors have taken a step back to evaluate the sector over the last six months or so. However, astute and seasoned investors recognize that this period of slowed activity and record-low interest rates provides numerous new opportunities for growth for those who know where to look and have trusted advisers on their side. The opportunity to acquire solid properties at a discount is greater when there is economic uncertainty, and smart investors use times like these to fill out their portfolios with potentially high-performing assets in growth markets like San Jose.
Johnston: Buyers right now are looking for those value-add assets where they can make improvements and increase rental income while providing much-needed and much sought-after housing in a growing Western market.
To what extent is San Jose’s tech-anchored economy providing insulation for the metro’s multifamily market?
Johnston: Tech markets like San Jose have traditionally fared well in our increasingly tech-oriented society. While some tech companies did experience layoffs as a result of COVID-19, others—like Amazon—added to their teams. During the pandemic, our collective reliance on digital communication and online shopping have benefited businesses that specialize in those areas, and this has held true in San Jose as in other tech markets throughout the country.
How does the San Jose multifamily investment environment compare to other markets in the Bay Area?
Levin: San Jose enjoys spillover from San Francisco and other Bay Area markets in both multifamily renters and investors. Buyers seek out opportunities to own or invest in apartment communities in San Jose where—like other parts of the South and East bay areas—rents have remained relatively stable, and leasing concerns caused by COVID-19 are more short-lived than long term.
What types of properties would you consider risky investments in upcoming quarters?
Levin: Luxury apartment communities are facing the greatest challenges from the pandemic. This is likely because luxury apartment renters were better equipped financially than middle-income renters to relocate elsewhere or downgrade if necessary, during the pandemic.
In addition, San Francisco is experiencing a significant market correction, so the Peninsula cities, Silicon Valley and the East Bay markets are better bets for investors for the near term in the current environment.
That said, rates have remained stable and the vacancy is low. COVID-19 will pass and as business returns to normal, fundamentals will continue to improve.
How has the coronavirus outbreak affected your practices? Has your business strategy changed since the onset of the pandemic?
Johnston: Our practices have continued to be strong since the pandemic started. The Bay Area is a consistently strong and steady market, and we are able to identify and secure top assets and substantial growth opportunities on behalf of our clients, thanks to the relationships our team has built over the past several years of specializing in this market.
Levin: The pandemic has certainly been a humbling experience. We continue to deeply value the trust our long-term clients place in us, even during times of economic uncertainty. We have come to realize how important it is now, more than ever before, to invest in well-located real estate like in the Bay Area. Our business strategy since the pandemic remains the same—we are 100 percent focused on our fundamentals and hard work, and strive to always be a reliable and transparent information resource for our clients.
In fact, we recently worked with a multifamily owner with several properties in the Bay Area. The firm had enlisted another brokerage team that had unsuccessfully marketed an apartment community in San Leandro for six months. Through leveraging our network and effectively communicating the asset’s strength, we were able to secure a buyer in just one week.
What are your predictions for San Jose’s multifamily market going forward?
Johnston: We are beginning to feel an overall sense that the pandemic will end sooner rather than later, which will bode well for the overall multifamily market. The cost of capital remains extremely low, and we’re advising our clients to acquire assets to hold over the next five to 10 years in strong markets like San Jose, as well as to complete 1031 exchange transactions that make sense in this market. There is a great opportunity in this region for savvy investors who leverage the opportunities that a downturn provides.