Robust Development Increases Vacancy
At the close of Q4 2015, vacancy in the Bay Area stood at just 4.5%. This reflects a slight increase from the 4.2% rate in place three months ago. The recent rise in vacancy can be attributed to a growing number of new development deliveries. By year-end 2015 more than 10,500 new multi-family units were delivered to the Bay Area marketplace, surpassing 2014, which delivered 9,300 units.
Meanwhile, Cushman & Wakefield research is tracking approximately 24,500 units under construction, the highest volume we have tracked in the pipeline in over 10 years.
Average Bay Area Rent: $ 2,453
Given these robust development numbers, vacancy in the region is up, however, rents have increased as well. The average asking rent in the Bay Area now stands at $2,453 per month. This number is up 9.6% over the $2,238 reading posted exactly one year ago.
The primary reason for this increase is that even with currently aggressive levels of new development there is a housing shortage (and affordable housing crisis) in the Bay Area. From 2010 to 2014 the region’s population grew by roughly 350,000 people; Alameda County alone has seen an increase of over 100,000 to its population and is among the fastest growing counties in California.
Lack of Inventory
However, during this same time frame, it is estimated that the region’s housing inventory (multi and single family) grew by only 40,000 units. That breaks down to just one new housing unit for every 8.5 new residents. Relief is certainly on the way through the recent delivery of newly constructed units and coupled with the current pipeline containing 24,500 units under development.
70,000 New Units in Pipeline
We are aware of another 70,000 units in the proposal stage that could go forward; a significant number of these projects will end up as condominium projects and will not have a direct impact on the multi-family rental market.
Rental Rate Growth
The region’s average asking rent has increased by 48% over the past four years. We anticipate the annual rental rate growth will fall below double-digit levels in the coming year, but that largely will be a reflection of slowing rental rate growth in the most heavily impacted development markets (San Francisco and Santa Clara counties) and the fact that most of the projects currently in the development pipeline are geared towards the higher-end market.
Rents for the higher-end market in San Francisco (more than 9,000 units currently under construction) and Santa Clara counties (just over 7,800 units underway) will modestly increase in the months ahead. But that trend may be short-lived and it will not change the underlying fact that it will take roughly five years of development at the current pace before we expect the region’s housing shortage to be tempered.
Class B & C Properties & the East Bay
In the meantime, rents for Class B and C properties will continue to increase. Lastly, the gap in rents between the Highway 101 Corridor markets (San Francisco, San Mateo and Santa Clara counties) and the East Bay (Alameda and Contra Costa counties) will continue to drive large levels of in-migration to the sunny side of the Bay. The East Bay (3.4% vacancy) already is the tightest market in the region; rental rate growth is accelerating rapidly there and this trend will only continue even as developers rush to bring new product to the market (particularly in Alameda County) with a strong concentration in Downtown Oakland and Jack London Square. The East Bay has actually outpaced the rest of the Bay Area markets in terms of rent appreciation, growing its average rate nearly 25% from two years ago.
Investment Activity in the Bay Area continues to remain strong as investors from all over the Globe hedge on the existing fundamentals of this region which boasts some of the strongest demographic metrics in the US.
The US market closed 3,627 transactions totaling $48.5 billion in total volume with average Cap rate of 6.4%. The Bay Area multi-family market closed 225 transactions in Q4 2015 totaling $2.3 billion in total volume. Cap rates experienced further compression, moving from an average of 4.4% to 4.2% for the entire region.