Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/595440
M A R K E T H I G H L I G H T: N O R T H E R N C A L I F O R N I A www.REBusinessOnline.com Western Real Estate Business • November 2015 • 19 RECORD-SETTING EMPLOYMENT FIGURES FUEL NORCAL'S STRONG MULTIFAMILY MARKET Fueled by record-setting employ- ment, the San Francisco Bay Area multifamily market is performing at its highest level in recent years in terms of low vacancy rates, strong rental growth, and new apartment communities coming online, under construction and planned. The San Francisco metropolitan area — which accounts for half of the San Francisco Peninsula, San Fran- cisco, Marin and Oakland — added about 4,100 jobs during September, according to Beacon Economics. This number is on par for most of the year. Sources from the City of San Jose re- ported the Bay Area added more than 40,000 new jobs during the 12-month period from October 2014 through September 2015. A further report from the Association of Bay Area Governments stated that "by spring of 2013, the region had re- gained all of the jobs lost in the 2007 to 2009 recession, while estimates indicate that the jobs lost since the higher peak in 2000 were fnally regained by the end of 2014. This rebound has spread unevenly throughout the region, with counties as diverse as San Francisco and Napa each having passed the two previous peaks in employment." Unemployment is running as low as 3.7 percent in the San Jose/Sunny- vale-Santa Clara MSA. It is under 5 percent for the entire Bay Area and Sacramento metro area. Apartment vacancy rates by major submarkets are: • San Mateo/Santa Clara County: 2.5 percent; down from 3 percent in 2014 • San Francisco: 3.4 percent; steady from prior year • East Bay: 3 percent; down from 3.5 percent in 2014 • North Bay: 2 percent; lower than a year ago • Sacramento: 4 percent; with some submarkets such as Roseville even lower San Francisco still leads the region in terms of average asking rent of $3,623 at the close of the third quar- ter (for buildings with more than 50 units), according to RealFacts. San Francisco rental rates have increased 9.9 percent over the past year. This number was 12.5 percent in San Ma- teo/Santa Clara, 10 percent in the East Bay, 9 percent in the North Bay and 7.5 percent in Sacramento. With vacancy rates low and steady rent growth in recent years, investors have competed aggressively to buy multifamily communities, especially apartments in good-to-great locations. Woodmont recently advised a sell- er on a 150-unit East Bay apartment community that was built in 1983. The community was designed well and enjoyed a good location, making it a value-add opportunity. It garnered 22 ofers, all from capable buyers, and the sale went to a best-and-fnal ofer round that resulted in the seller at- tracting a price that was well over the initial expectations. Cap rates on apartment sales of more than 100 units are running as low as 4 percent in San Mateo/Santa Clara, and as "high" as 5.2 percent in Sacramento. Absorption rates for new multifam- ily projects have also been very posi- tive. While variation exists depending on pricing strategy, it is safe to say that all of the newly built product is performing ahead of initial pro-forma in leasing and rents achieved. A new community in the Japantown area of San Jose is averaging fve to six new leases per week, for example. The prevailing trend in the North- ern California multifamily sector is the volume of renovation and retroft- ting projects that have been complet- ed or are underway. The reasons for this trend are three- fold: there is a lot of older housing stock in the region, all of the new apartments coming online are put- ting pressure on owners to renovate and lastly, with four or fve consecu- tive years of rental growth, owners are more willing to take on major renova- tion expenses. And if they don't reno- vate now, the quality of their rental housing will decline. The San Francisco Bay Area has his- torically been a supply constrained environment for housing due to geog- raphy and societal pressures to limit growth. About 4,276 apartment units were delivered in the frst quarter this year Ron Granville CEO, Woodmont Real Estate Services in Belmont, Calif. Jeff Bosshard President of Multifamily Operations, Woodmont Real Estate Services in Belmont, Calif. NORCAL'S RETAIL OCCUPANCY GROWTH SHOWS POSITIVE MOMENTUM As of the close of the third quarter of 2015, shopping center vacancy in the Western U.S. stood at 6.8 per- cent. This refects a slight decline from the 6.9 percent rate that was in place three months ago, and a more signifcant decline from the 7.2 per- cent rate of exactly one year ago. The real question in looking at occupancy growth trends in the Western U.S. is where are they coming from and how stable are they? Cer- tainly new construction is driving much of the activity. In terms of occu- pancy growth, the tightest Pacifc markets in terms of vacancy include San Francisco, including Peninsula and North Bay (4.7 percent); Santa Barbara (4.7 percent); Oakland/East Bay (5.3 percent) and San Jose/Silicon Valley (5.3 percent). In virtually every one of these markets we can boil occupancy growth down to two basic trends: the continued absence of the middle class con- sumer and the impact of e-commerce. In terms of e-commerce, though there are a few online players looking for bricks-and-mortar space, most occu- pancy growth is being driven by those retail categories that don't compete with online players. Food-related retail (restaurants and grocery) is leading the way, as is service retail. Though luxury retail continues to expand, particularly in the nation's high street retail districts, discount and of-price retail is what continues to ac- count for the lion's share of occupancy growth totals. Though the American middle class consumer is in a better place than in years' past, we have yet to see a resurgence in spending to buoy mid-priced hard goods retailers. Direct competition with e-commerce will continue to be an issue in the retail world for years to come, but the impact of showrooming and the use of technol- ogy to research retail purchases may actually be a bigger threat to retailers. Those trends, more than any other, are impacting retailer margins and con- sumer shopping patterns in a way that may turn out to be permanent. Garrick H.S. Brown Director of Retail Research for the Americas, Cushman & Wakefeld www.crelc.com Northern California Presented by MEET, GREET & NETWORK WITH THE FOLLOWING PARTICIPANTS: 818-532-7660 • www.crelc.com November 10, 2015 Grand Hyatt San Francisco November 10, 2015 FEATURING KEYNOTE ADDRESS by Mike Smith and Garrick Brown of DTZ Mike Smith President West Region Garrick Brown Vice President Research COMMERCIAL REAL ESTATE TM www.crehub.net continued on next page