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INFORM
Knowledge is power when navigating a fluctuating real estate market.
INDUSTRY NEWS & MARKET TRENDS
EAST BAY MARKET REPORT
By Grant Chappell
After 15 months of the work-from-home trend, the East Bay shows its stability and appeal as San Francisco struggles. Sales volume dipped in commercial properties early in the pandemic, but a flurry of capital is chasing well-located multifamily assets again. Despite ongoing local, state and national political concerns, real estate has historically served as an excellent inflation hedge and may be a key driver in investor mindset. Evidence that the rental market has finally bottomed out also helps ease investors’ concerns, but we have yet to see how the new construction will be absorbed and if we will see another drop in rents next year.
As of May 2021, San Francisco still retained the spot as the nation’s most expensive rental market, with a median rent of $2,650 for a one-bedroom, down 21% from the prior year and up 1.9% from the prior month. Oakland is down to the sixth spot, with a median one-bedroom rent of $1,980, down 16% from the prior year, yet up 1.5% from the prior month, according to the May 2021 Zumper Rent Report. While the report does not explicitly state leasing incentives, it has consistently served as a data source for this article when looking at trends. However, I suspect moving/relocation costs and free months of rent will continue to be a factor with additional new construction coming online.
San Jose and Los Angeles rents are also down approximately 9% compared to pre-pandemic levels. Washington, D.C. moved to the No. 3 spot behind New York City, with median one-bedroom rent back to pre-pandemic levels at $2,220/month. Of the remaining cities in the top 10, two have exceeded pre-COVID rents, with San Diego and Santa Ana achieving year-over-year increases of 6.8% and 1.2%.
Construction cost increases represent a threat to the new supply of apartments. Since the beginning of the year, prices for lumber, oil/gas and other inputs are up over 30%50%. While we still have a housing crisis in California (as reflected in the number of cities in the top 10 most expensive rental markets), high construction costs limit developer willingness to break ground on new projects.
The Federal Reserve has kept rates at historic lows since the pandemic started. We’ve used the term “historic lows” in the past in this column, but it’s a return of the Fed policy under Bush/Obama terms, when the 2008 crisis required massive government intervention. Regardless, inflation may finally be catching up to the Fed, and they may have to rethink policy if inflation finally exceeds their low 2% target.
This is mixed news for the real estate market. For commercial properties, higher interest rates and borrowing costs puts downward pressure on prices. On the other hand, hard assets like real estate tend to provide a hedge against inflation, which also brings investors to the table, even if the returns are lower going in. BlackRock, the world’s largest asset manager, recently sent a bullish signal on real estate as The Wall Street Journal reported they are paying 20%-50% above asking prices to acquire single-family homes in markets across the U.S.
A common discussion we have with our clients is whether or not the work-from-home trend will be permanent or temporary. Large Bay Area companies like Google and Adobe have policies allowing employees to live within a commuting distance of two hours or less. Apple made headlines recently as over 2,800 employees signed a petition opposing a full return to Apple’s $5B corporate campus in Cupertino.
2-4 UNITS
For 2-4 unit multifamily buildings in Oakland, Berkeley and Alameda markets, Q1 2021 sales have recovered and improved since a heavy decline that began in Q1 2020. According to the MLS, sales improved from $83.5M in Q1 2020 to $117.3M in Q1 2021 for Alameda; $17.1M to $37.5M for Berkeley; and $54.4M to $66M in Oakland. The positive trend continues in the quarter-to-date sales figures for Q2 of 2021 as buyers return to the market.
5+ UNITS
For 5+ unit multifamily buildings, price-per-unit can provide a more accurate view of the market, since bigger buildings exhibit wider-ranging values and ownership cycles. As the pandemic began in Q1 2020, the East Bay and San Francisco recorded their highest price-per-unit valuations of $382K and $646K, respectively. From there, different narratives play out, as they hit lows of $371K for the East Bay and $587K for San Francisco in Q4—the San Francisco region losing $44K more per unit.
The East Bay submarkets tell the story of stability. In Alameda, price-per-unit went from $382K to $371K between Q1 2020 and Q1 2021; $436K to $429K in Berkeley; and $384K to $376K in Oakland. At the regional level, San Francisco price per unit valuations have grown by 5.9% over the last 10 years, while the East Bay valuations have grown by 8.05% over the same time period. The East Bay continues to prove its value with a fast upward trend and modest variation when faced with headwinds.
In summary, we are encouraged by the uptick in sales volume and pricing. The single-family market in the East Bay has reached all-time highs and continues to move higher. Higher interest rates may dampen pricing and demand if the Federal Reserve is forced to raise rates ahead of schedule. The bigger question is whether companies will start to force more of their employees to come back to the office part- or full-time. This unanswered question will have the largest impact as, similar to UC Berkeley seeing an influx of students returning in the fall, an influx of employees coming back to the office will bring more renters back to the Bay. It could already be happening.
Chappell Team has been serving the East Bay multifamily market for 16+ years, helping clients acquire, dispose, trade and evaluate multifamily properties. Please reach out for any of your commercial real estate needs.
