San Francisco and Bay Area housing is notoriously expensive, but there's more to the story than skyrocketing apartment rents. Bisnow chatted with Walker & Dunlop San Francisco's Jeff Burns about the current and future state of San Francisco's multifamily market.

Bisnow: What major trends are you seeing in San Francisco multifamily?

Burns: So the San Francisco Bay Area as a whole has been one of the strongest markets in the whole country for multifamily over the last seven years. We’re finally seeing a decent amount of new supply come online in the last year in particular, as it takes quite a long time to get a project all the way through entitlement and permits in the Bay Area. Consequently, we were really lacking supply for the better part of this decade. But we’re starting to see quite a few new projects come online. The biggest new trend is that we’re starting to see rents soften on new Class-A products.

We’ve looked at lease-up deals where the units renting right now obtain slightly lower effective rents than units in the same project getting signed last summer. There’s a great deal of new supply — although the market overall is still undersupplied. In terms of the high-end, brand-new product, we’re seeing rent levels soften a bit.

Bisnow: Have you noticed a change in the risks lenders are willing to take in the multifamily developments they are financing in San Francisco?

Burns: Yes. However, I would say that on the permanent loan side, we’re seeing Fannie Mae, Freddie Mac and other capital sources continue to aggressively lend on stabilized multifamily projects. What we have seen in the last six to nine months is that commercial banks on the construction side are starting to pull back a bit. They are not quite willing to go as high in terms of loan-to-cost; they’re asking for more recourse than they have in the past — and we’ve seen pricing on that product widen out. It’s a combo of worry about supply in addition to regulatory changes banks are facing with Dodd-Frank, capital reserve requirements and construction lending.

Bisnow: How should multifamily developers move forward in response to the affordability crisis?

Burns: What you’re seeing is local jurisdictions in the Bay Area continuing to either increase the affordability required for developers to include on new projects, or you see an increase in impact fees going to local jurisdictions to create more affordable housing. I think you’re only seeing costs associated with that go up; there really is a crisis in many of the Bay Area communities right now.

After the November election, a number of local cities have been passing different forms of rent control. At their current levels, rents will continue to be very challenging for many folks, and attempting to qualify for the home mortgages that would allow them to access the single-family market will continue to be difficult. There will continue to be pressure on rents.

Bisnow: Are you seeing an uptick of larger/more established families relocating to the suburbs or other parts of the Bay Area, or are families avoiding the Bay Area altogether? Is San Francisco going to become even more of a “single” city than it is?

Burns: It’s tough. If you’re a longtime tenant in [San Francisco], you obviously benefit from rent control. But that also keeps the number of available units artificially lower. We just financed a property out in Modesto, and I was surprised by the number of tenants that had jobs in the heart of the Bay Area or even on the Peninsula. That’s a really long commute!

But they’re chasing affordable rents all the way out to the Central Valley, and we saw that during the financial crisis of 2008-09, that trend stopped. However, as rents in the Bay Area have increased — in some cases, by the double digits — annually, we’ve seen people look towards those markets in the Central Valley for affordable housing.

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