Here's Where Bay Area Rents Are Falling Or Holding Steady

Despite historic supply growth, East and South Bay multifamily developers say market woes should be limited to shorter-term leasing challenges rather than plummeting rents.

Marketwide average rents in the South and East Bays have yet to fall much from their highs despite the downturn, CoStar data shows. As of June 1, asking rents in the South Bay were down by 2.86% year-over-year, while in the East Bay they were down just 0.71% compared to that time last year, according to CoStar.

In both markets, developers are holding relatively still on rents, experts say. In Oakland, The ADDRESS Co., an East Bay multifamily developer, doesn't plan on lowering rents, according to CEO Eric Chevalier, who spoke during Bisnow's East Bay State of the Market webinar on Thursday.

“We have a project in Jack London Square and we’ve been interviewing different property managers and we’re getting the exact same feedback of you don’t necessarily need to lower rents," he said. "However, concessions are high on their list."

Many multifamily developers looking to the East Bay have anticipated strong rent growth. In Q1 this year, average asking rents across unit types in Alameda and Contra Costa counties had risen year-over-year by 2.8% and 1.8%, respectively, according to Kidder Mathews.

In the South Bay, KT Urban partner Shawn Milligan said he has heard anecdotal evidence of asking rents dropping 10% to 15% and that short-term uncertainty makes planning new projects difficult.

"In the short-term, I think it’s going to be challenging to get the data to support the construction costs that we’re facing," Milligan told Bisnow.

But marketwide averages across the San Jose area have yet to budge, according to CoStar. In the last few years, the South Bay has seen rents increase. Average asking rents in Santa Clara County rose 2.9% year-over-year last quarter, according to Kidder Mathews.

Both the East Bay and South Bay markets still have historically large pipelines. A year after Oakland alone outpaced S.F. in housing production, the East Bay has about 10,200 market-rate apartments under construction as of this month, according to CoStar Group.

Similarly, before the economic downturn, the greater San Jose area was poised to see supply growth more than triple this year, according to RealPage. About 6,300 units are under construction as of today in the San Jose metropolitan statistical area, CoStar data shows.

S.F., meanwhile, has seen a volatile housing pipeline in recent years as rent growth has stalled. It was 0.2% year-over-year last quarter, according to Kidder Mathews, as deliveries rose but the overall pipeline began to thin.

Now, with construction continued and many of those units coming online, leasing in markets like Oakland will proceed slowly and with more tenant concessions, according to Strada Investment Group Managing Director William Goodman.

"I do think, particularly in Oakland, where there are a lot of projects coming online, lease-up is going to be tough in the short-term, but I think that will settle out eventually," he said.

Goodman and Strada have two big Oakland projects in different phases: 1100 Clay St., a 288-unit joint venture with CIM Group scheduled to deliver later this year, as well as a transit-oriented development near the Lake Merritt BART station with East Bay Asian Local Development Corp.

Speaking during Thursday's webinar, Goodman said newer projects, including Strada's joint venture with CIM, will for the time being look to offer attractive concessions like some free rent upfront.

"You're seeing healthy concessions and leasing incentives in the market right now, folks trying to keep rents as high as they can but offer in pretty good deals on the incentive front," he said. 

"We were already talking, leading into 2020, about rent growth slowing and the logistics of leasing up this amount of units in this short period of time," CoStar Group Senior Market Analyst Marco Cugia said of Oakland's booming multifamily market. 

With Oakland and the East Bay as a potentially growing job sector and Silicon Valley's tech-fueled economy relatively resilient, developers in both markets are still high on them. 

"For us, the East Bay is just a value play," Chevalier said during the Thursday webinar. "I think people are migrating to more affordable areas, relatively speaking."

Milligan, too, said he is similarly optimistic about Silicon Valley's long-term prospects. 

"Longer term, I still think Silicon Valley is one of the best places in the country for multifamily real estate," he said. "We've had such a structural imbalance between supply and demand that that will offset the short-term headwinds we face."