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Bay Area Multifamily Markets May Have Peaked. Time To Sell, Ten-X Says

San Francisco painted ladies skyline
credit: Samuel Wantman

San Francisco, Oakland and San Jose are ideal markets to sell multifamily assets, according to the latest findings from Ten-X. These major Bay Area markets have received additional supply, which has pushed up vacancies. Rents also may have peaked, leaving multifamily assets vulnerable for diminished returns. Sacramento, on the other hand, is an ideal market to buy assets.

In San Francisco, multifamily completions have outpaced absorption since 2014. Vacancies have risen and rent growth started to weaken last year. Employment growth has slowed from upper 4% in early 2016 to about 2% in 2017 related to a slowdown in the city’s critical information sector. Ten-X expects the region will face net operating income declines of about 4.7% through 2020.

San Jose can expect similar prospects. New supply hitting the city is pushing vacancies up to the 4% range. Overall job growth has cooled slightly despite a robust information sector, and slow population growth is limiting potential expansion. Rents are expected to contract in 2018 and vacancies are expected to climb above 7%. Ten-X expects annual net operating income to decline 3% from 2017 to 2020.

While it may be a good time to buy office assets and employment growth has been strong in Oakland, the East Bay city is subject to negative spillover from declines in San Francisco’s information sector. Vacancies are at about 3.4%, a 40 basis point increase from 2016. Ten-X’s downturn scenario projects completions will outweigh demand and result in rental contractions. Modest net operating income gains are expected in 2016 with declines of 4.4% expected in 2019 and 2020.

Sacramento’s multifamily market is growing rapidly as Bay Area residents flee high-priced rents. With only a modest supply pipeline, vacancies are at near-record lows. Employment is rising, driven by the government sector and posted growth over 1% year-over-year. The city’s population also grew 1.3% in 2016, which outpaced the national average. The city’s overall market strength will help it get through Ten-X’s recession downturn scenario of 2019-2020. Solid gains in net operating income are expected as well.