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Multifamily Investors Flock To Bay Area Assets Even With Several Challenges Looming

Investors are paying top dollar for multifamily assets in the San Francisco Bay Area, lured by ongoing rent increases, tremendous demand and strong employment growth. Even with the potential negative impacts of a repeal to the Costa-Hawkins Rental Housing Act looming, investors keep coming to the Bay Area.

San Francisco. Though prices have dropped a bit recently, it remains the most expensive place to rent an apartment in the country.

Sales volume in the Bay Area increased $458M to $1.2B during Q2 quarter over quarter, according to Cushman & Wakefield’s second-quarter Market Insight Multifamily Report. Sales volume reached $2B year to date with an average of $421K price per unit. Private and institutional capital made up 78% of the total investment activity.

Bisnow’s Multifamily Annual Conference NorCal on Nov. 1 will highlight investor appetite, the impact of a possible Costa-Hawkins repeal on rent control, the Bay Area housing crisis and affordable housing, the future of modular construction, the next generation of multifamily amenities and development opportunities.

What Is Driving Investor Activity?

The market is especially strong in California and the West Coast, according to Real Capital Markets’ 2018 Multifamily Investor Sentiment Report.

San Francisco, Southern California and Seattle are the best West Coast locations for multifamily ownership because of strong fundamentals and the potential for rent growth, Equity Residential Executive Vice President and Chief Investment Officer Alan George said in a statement.

In the Bay Area, investors have been largely following tenants and residents. With rising rents and prices in San Francisco and Silicon Valley, tenants and residents are migrating to surrounding suburbs such as Mountain View, Redwood City, Oakland, Fremont and the East Bay, Levin Johnston of Marcus & Millichap Senior Managing Director Adam Levin said.

Levin Johnston of Marcus & Millichap Senior Managing Director Adam Levin with his wife, Ella, daughter Taylor and son Connor

The expansion of tech firms into other markets combined with the highly educated workforce have made Bay Area markets extremely attractive to investors, Levin Johnston of Marcus & Millichap Senior Managing Director Robert Johnston said.

While the Bay Area has been a longtime gateway market attracting a variety of investors, including large institutions and high net worth individuals, rising prices in the region’s urban cores are attracting more small and midsize fund managers and high net worth individuals focused on value-add multifamily in the region’s outlying suburbs, Levin said.

Because of the tremendous demand, investors are able to find value in repositioning distressed, under-renovated or underperforming assets in these markets, Johnston said. These properties are often smaller in scale and had long-term passive ownership that resulted in deferred maintenance and a lack of upgrades.

At the same time, with more investment activity, it also is becoming harder to find value-add deals, Johnston said.

What Investors Are Paying For Bay Area Multifamily

Levin Johnston of Marcus & Millichap Senior Managing Director Robert Johnston and his wife, Natalie

Transactions are up across multiple Bay Area markets. The number of sales in San Francisco increased 3% during the first half of 2018 compared to the first half of 2017, with investors eyeing properties in Richmond, the Mission District and Downtown San Francisco, according to a report from Marcus & Millichap. Average price per door exceeded $429K.

In San Jose, average price per unit surpassed $360K with premier submarket properties reaching over $450K per door in Palo Alto and Mountain View. Marcus & Millichap expects investors seeking higher yields to focus on properties in Central and East San Jose where cap rates are 50 basis points above the average metro rate of 3.4%.

In Oakland, average price per door reached a high of $255K over the past 12 months ending June 30 related to increased demand for Class-B and Class-C properties in the Interstate 880 corridor. Nearly half of the activity was in Berkeley, Oakland and Fremont. Capital will continue to eye properties in the outer suburbs with cap rates in the low-to-mid 5% range, according to Marcus & Millichap.

PGIM Real Estate, Brookfield and Pacific Urban were among the most active buyers of Bay Area multifamily properties, according Cushman & Wakefield. PGIM made one of the biggest purchases of the quarter when it bought a 50% stake in five properties totaling 745 units from the Los Angeles County Employees Retirement Association and CityView for $250M ($615K/unit).


Bay Area cap rates averaged about 4.4% during the quarter, its lowest rate of the current cycle. In 2011, cap rates averaged 5.5%, according to Cushman & Wakefield.

Institutional Property Advisors Senior Managing Director Phillip Saglimbeni said there is steady or often increased levels of competition for properties in gateway markets such as the Bay Area. One driver is the cap rate compression that has occurred between historically low-yielding markets such as the Bay Area and evolving or secondary markets such as Denver, Portland, Phoenix and Las Vegas. As a result, many buyers are showing new or renewed interest in the Bay Area based on favorable risk-adjusted returns.

Rent growth and demand continue to rise as well. Bay Area rents averaged $2,731, an increase of 4.5% year over year, according to Cushman & Wakefield. A Zumper report revealed that San Francisco rents are the highest in the country, reaching an average of $3,650 for October. 

Even though new deliveries will provide some relief to demand, Cushman & Wakefield anticipates rent growth to continue to rise. The Bay Area’s asking rent has doubled since 2006, according to Cushman & Wakefield.

“Because homeownership in the region is so expensive, many residents are forced to rent rather than own,” Johnston said. “This results in increased demand for multifamily properties, low vacancy rates and opportunities for increased rent growth.”

There may be some signs of trouble ahead despite the strong market dynamics. Vacancies are rising and rents have begun to peak, which is making multifamily assets more vulnerable to diminishing returns, Cushman & Wakefield reports.

California voters also will have the opportunity to repeal limits on rent control, which would create much uncertainty across multiple markets.

Will Prop. 10 Keep Investors Away?


Proposition 10 could stifle investor interest in the high-demand Bay Area. The proposition would repeal the Costa-Hawkins Rental Housing Act, which limits rent control to properties built in 1995 or earlier.

“A repeal of the act would enable municipalities to adopt more restrictive rent control measures in their cities, which in turn may negatively impact investment activity in multifamily properties,” Saglimbeni said in a statement.  

Investors will have to do much more due diligence as well.

“Property owners will approach investments much more cautiously, ensuring that the deals pencil with these new measures in place,” Levin said.

Investors also could shift their focus from California to regions where there is less uncertainty, like Seattle, Salt Lake City and Denver, Johnston said.

Despite these potential challenges, multifamily will remain attractive in the Bay Area. Demand is expected to outpace supply, market fundamentals will be strong and renter demand will continue to grow, Levin said.

“Compared to other product types, multifamily provides investors with long-term value,” Johnston said. “People are always going to need a place to live and are seeking areas that deliver the live-work-play lifestyle that the Bay Area provides.”

High-wage employment growth in tech and ancillary services sectors will continue to play into the Bay Area’s strong market fundamentals, Saglimbeni said. Ongoing rent growth in all three Bay Area metropolitan statistical areas is expected to trend above the national average for the foreseeable future.

“We do not anticipate any meaningful shift or disruption that would alter the area’s housing supply-demand imbalance,” Saglimbeni said.  

Learn more about multifamily investor interest and the impact of Prop. 10 at Bisnow's Multifamily Annual Conference NorCal Nov. 1 at Hotel Nikko in San Francisco.

CORRECTION, OCT. 5, 9:30 A.M. PT: A previous version of this story had incorrect titles for Levin Johnston of Marcus & Millichap Senior Managing Directors Adam Levin and Robert Johnston. The story has been updated.