Will 2018 Be Another Good Year For Silicon Valley Multifamily?

Silicon Valley’s multifamily market will continue to benefit from strong job growth that is propping up demand for housing as we enter 2018. The ongoing supply/demand imbalance throughout the region will continue to drive both ground-up development and renovation in old properties.  

Silicon Valley is an ideal market for investment and redevelopment because the housing stock is 50 to 60 years old and can benefit from modernization, according to Calvera Partners Managing Principal Brian Chuck. Additionally, Silicon Valley offers good market dynamics, including a strong employment base with a highly educated workforce, barriers to entry and mass transit infrastructure, he said.

Continued job growth does not suggest any kind of pending collapse in the Silicon Valley apartment market, but dynamics will likely start to shift, Chuck said.

“To expect the next five years to mirror the growth of the previous five is unreasonable,” Chuck said. “It seems reasonable to expect rent growth to revert back to long-term historical rates and to expect demand, both on the tenant side and investor side, to remain strong.”

Calvera Partners renovates properties that were mispriced or poorly operated and near major employers, highways or public transit and strong submarket demand and have access to a downtown area. It prefers sellers that were long-term owners that did not see the potential in their properties or lack the ability or capital needed to reposition the property, Chuck said.

It acquired a 20-unit apartment complex in Mountain View for about $7.3M (about $363K/unit) in November. About 40% of the units were vacant, which will allow the investor to upgrade the units with new flooring, lighting and countertops.

Monroe Villa at 565 Excuela Ave. was Calvera’s 10th acquisition in Silicon Valley and second acquisition in its fully discretionary real estate investment fund, which targets underperforming apartment properties in emerging neighborhoods around the country. Calvera Partners also recently sold a 37-unit complex, pksl, in Sunnyvale for $15.7M, about 45% higher than when it purchased the asset for $8.3M in 2014.

The investor typically renovates properties with new paint schemes, facade and siding, landscaping and new building signage. While site constraints may limit the kinds of amenities Calvera Partners can add, it tends to add high-demand amenities like community WiFi, secured bike storage and communal areas where tenants can work and socialize. Just about everything is replaced in each unit as well. 

New Multifamily Development Becoming More Challenging

Building new housing in the South Bay is getting much more difficult even though there are strong dynamics to do so. Increased construction costs and fees add challenges for multifamily developers, which are facing additional local opposition to high-density housing projects. Existing residents continue to equate high-density housing with additional traffic congestion, according to SummerHill Apartments Executive Vice President Katia Kamangar.

“Everyone acknowledges that the Bay Area needs more housing, both affordable and market rate, yet there sometimes isn’t enough political will to approve these larger projects, which is a loss for the region as a whole,” Kamangar said.

The increased NIMBY factor as well as additional ridership on public transit has shifted SummerHill Apartments’ appetite to projects near large-scale transit stops along Caltrain and BART. Other opportunities include sites near downtown cores close to retail, services and restaurants.

While just about all Class-A apartment buildings now have a clubroom, swimming pool and spa, fitness center and pet spa, one amenity is fast becoming the distinguishing factor.

“The 'wow' factor still comes from the best-executed rooftop amenity spaces,” Kamangar said.

Some rooftop decks offer views and other are gathering places with fire pits. SummerHill Apartments is including rooftop decks in more of its buildings to not only provide the in-demand communal spaces, but also as a distinguishing factor.  

Kamangar said she expects increased density and more of a push toward smaller units even in suburban markets along the Peninsula. Parking ratios will decrease while stackers for parking garages will increase, she said.

Find out more about multifamily trends from SummerHill Apartments' Katia Kamangar and other industry experts at Bisnow’s The Rise of Multifamily in Silicon Valley Jan. 25 in San Jose.