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More Pain Likely Before Possible Huge Gains For Bay Area Multifamily

San Francisco has experienced deep losses in multifamily rental prices with those lost rates appearing as growth in secondary cities like Sacramento. Even prior to the coronavirus pandemic, there was a migratory trend out of S.F. to Sacramento by those seeking cheaper accommodations or homeownership, and the pandemic has accelerated the (perhaps temporary) exodus of tech workers. Although this has created a bifurcation in rent growth patterns, some degree of reversal may be ahead.

San Francisco

Nationally, year-over-year rent growth ended fairly flat at -0.8% in December, according to a Yardi Matrix report. The steepest declines occurred in the coastal cities of San Jose at -13.7%, New York at -11.7%, San Francisco at -9.4%, Seattle at -6.2% and Washington, D.C., at -4.9%. Meanwhile, Sacramento and California’s Inland Empire topped the national rent growth charts at 6.1% and 7.3%, respectively.

These changes were largely brought about by the coronavirus pandemic's forcing tech workers to work remotely and thus enabling them to opt to pay relatively cheaper rents in places like Sacramento versus S.F., which still maintains the highest one-bedroom rents in the country despite the losses. 

Although the promise of widespread vaccination foretells an eventual return to normalcy, Yardi Matrix forecasts further rent growth declines of 1.7% in S.F. and 1.4% in San Jose in 2021. Conversely, Sacramento is expected to grow by 3.4%. 

The numbers may be stunning, but they’re in line with a pre-pandemic trend described by a March 2020 multifamily trend report from Yard Matrix describing diminished rent growth in San Francisco in recent years as tech firms and their employees have sought lower-cost areas. 

It’s also notable that while apartment rents have dropped, Bay Area housing prices remain strong. In November, annual home prices in S.F. were up by 8.3%, just under the national rate of 9.5%, according to an S&P CoreLogic press release. 

CBRE Capital Markets Executive Vice President Jefrey Henderson commented that studios and one-bedroom units have mainly been affected by work-from-home policies, as residents in those units are more likely to have left high-priced S.F. when their jobs went remote. In contrast, two-bedrooms have largely maintained rental rates. He said that though CBRE’s data sources predict another drop of between 1% and 3% in rents for the Bay Area this year, the 2022 forecast shows a huge positive leap from anywhere between 27% and 35%, based on the expectation that urban offices will reopen. 

Although such an increase would surprise many, similar leaps occurred in the years after the Great Recession. Between 2014 and 2015 many parts of the region saw double-digit year-over-year rent increases with 33% growth in S.F's Ingleside Terrace, 32.4% in Berkeley and 14.9% overall for the Bay Area, according to data from Zillow as reported by Curbed San Francisco. If history repeats itself in 2022, the mechanics would be similar: a large influx of young or mobile professionals seeking apartments within commuting distance of the core tech hubs of the S.F. Peninsula and Silicon Valley resulting in skyrocketing rents. 

There is a possible early sign that S.F. rents are headed upward. The city’s month-over-month rental rate for January 2021 was up 0.8% for one-bedrooms and stayed completely flat for two-bedrooms, according to Zumper’s National Rent Report February 2021, which stated, “It’s likely too early to determine if this is an inflection point for prices in the Bay Area, [but] it certainly could be.”

“We’re going to see a lot of these workers pack up and move back to the Bay Area to get back to transit-oriented development, to get back to a live-work-play lifestyle,” Henderson said. “For right now, you’ve got this leash that’s been extended from companies, but the idea of chaotic collaboration, you don’t get that in suburbia the way you get it in the densely packed inner core areas where we think ideas spread a bit more rapidly.”

“The need for collaboration is critical,” Henderson added. “So we think that the companies that have taken the most space in the last five years are not going anywhere drastically. We see very few tech-oriented companies with more than $100M in revenue exiting the Bay Area en masse.”

Many tech companies have been exiting San Francisco, but the big players like Google and Amazon have continued to expand their Bay Area footprints during the pandemic. Plans to reopen offices vary from company to company, with some eyeing some level of in-person working conditions this summer. Google has plans for reopening in September. Henderson expects that pay cuts for those continuing to work remotely, along with the reopening of urban entertainment venues and amenities, will bring people back to offices in droves. While this may result in rental rate fluctuations in places like Sacramento, Senior Vice President of 29th Street Capital Kevin Smith told Multi-Housing News that the continued housing shortage has driven up rents in the city since the recovery from the Great Recession. He expects the trend to continue into the foreseeable future. 

“The super-region of Northern California cannot live without Sacramento, and the Bay Area cannot either, whether you’re talking on the political sphere or you’re talking about the exchange of labor,” Henderson said. “A lot of construction labor, a lot of blue-collar labor comes from Solano County up Highway 80 and reaching all the way into Sacramento. There’s just such a symbiotic relationship between the locales that I don’t think that the importance of one versus the other should be overestimated. Whereas on the other hand, I don’t think that pitting one against each other is the right way — it would be underestimating the importance of both regions.”