Multifamily Rent Stagnation In San Francisco Driving Capital To The East Bay

Multifamily development and occupancies in the East Bay are outpacing those of San Francisco and the rest of the Bay Area, according to panelists at Bisnow’s Bay Area Multifamily event on Thursday.

Driving much of this trend is the difficulty in gaining development approval in San Francisco, but the opportunity for higher rental rates in the East Bay and outer cities is another underlying factor. The rental gap between San Francisco and the outer cities has generally flattened in comparison to previous years, the San Francisco Chronicle reported earlier this year, noting that cities like Petaluma and Santa Rosa have seen rental spikes as high as 10%.

Sean Rawson, co-founder and head of acquisitions and development with Waterford Property Co., expressed optimism about the state of rent increases over the next six to 12 months in the metros outside of San Francisco.  

“In the East Bay and Milpitas, we’re bullish,” he said. “We’re seeing it, in terms of rent increases.”   

That is an appealing contrast to San Francisco, where construction cost escalations have not been countered by rising rents, leading to financial headaches for developers, Urban Pacific co-founder Chris Collins said. 

San Francisco rental rates haven’t moved much in either direction since the pandemic, according to calculations from Zillow and Bloomberg, which noted a 0.3% increase in rent since February 2020. Rental rates on average dipped slightly below the $2,800 mark at the end of 2020, but they moved back up to $3K with incremental increases ever since. 

The lack of rent growth is often attributed to lower-than-usual occupancy. Jack Sylvan, senior vice president at Brookfield, said San Francisco multifamily occupancy dipped to the low 70% range in some cases over the past two years, but he foresees a bounce back for San Francisco on the horizon. 

“About the summer end to the end of last year, our other properties started getting back to occupancies that were healthy in the low-90s, but not strong enough to be raising rents, that’s improved a little bit,” he said. 

Remote work has been a common scapegoat across the multifamily industry for low occupancies and the inability to raise rents in San Francisco, and like other developers and investors, Sylvan was hopeful the pandemic would have waned late last year, sending that workforce back to the office. Instead, workers stayed home and leasing volume stayed low. His firm saw that play out in the initial slow lease-up on The George, a multifamily project Brookfield recently completed in SoMA. 

“We started very slow, we probably had like five leases in the first six weeks but is certainly not what we underwrote,” he said.

Sylvan said the leasing activity has picked up slightly since March. 

Collins said he expects the East Bay and surrounding areas to see sizable investor and development growth in the coming months as a result of the regional rent discrepancies, with the expectation that markets like Santa Rosa and other “second cities” around the Bay will be much more of a focus area for the investment side, which he attributes to growth potential and a strong job market. 

“Probably a different way to build, probably a different price point, but still attractive rents, an attractive place to live,” he said in reference to Santa Rosa.    

San Francisco is also a harder place to get projects off the ground, which Robert Freed, president and CEO of SummerHill Housing Group, said could cause developers to look elsewhere. 

“Capital is going to go where it can get a risk-adjusted return,” Freed said.

Collins said building in San Francisco involves butting heads with local government when trying to get permits and approvals, which is particularly frustrating given the area’s well-known dearth of housing and political leaders who say they want to solve it. 

“With San Francisco, there’s an increasing set of challenges to development of the housing, especially that the state and local leaders say they would like to encourage, and yet it’s becoming increasingly difficult to do that,” Collins said. 

Sylvan said developers need to be nimble when it comes to development projects in San Francisco. He has a project under entitlement in the peninsula that according to Sylvan “doesn’t make sense” due to the project’s currently proposed density, and he expects it will need to go back through the entitlement process as they look at “undensifying it.”   

“I am quite certain the city is gonna scratch their heads because they want the housing, but that’s just where things are right now,” he said.   

Though Sylvan had to de-densify, Freed said he is seeing a slight shift in development trends to higher density housing — his firm moved more heavily to one-bedroom units. This change is supported by the rise in larger families migrating out of the city, leaving investors and developers steadily more reliant on single-occupant tenants in San Francisco.  

Developers and value-add investors have also been increasingly targeting middle-income and workforce housing renters within the East Bay with acquisitions aimed at conversions. The California Statewide Communities Development Authority and Opportunity Housing Group acquired the Wood Creek Apartments in Pleasant Hill from Equity Residential earlier this year, with plans to convert half of the units into workforce housing. 

Rawson also said his company has been very active in California in acquiring what Waterford dubs as “essential housing” — which it defines as income-restricted housing for households making 60% to 120% of the area median income. Rawson said he believes there’s a strong demand in the market for more moderate-income housing.

“We think there’s a structural demand for more.”  

Despite the supply chain and cost concerns plaguing developers, Rawson said there’s a lot to be optimistic about in multifamily due to the general demand from investors.

“There’s still a tremendous amount of institutional equity,” he said.

Freed said he expects longer hold times for developers in general across the Bay Area. SummerHill will have to expect longer debt and equity on its planned projects, which will lead to longer hold periods. While the company has no plans to shift its appetite away from urban infill, Freed cautioned that conservative valuations could stymie deals. 

“I’m preparing that when we want to sell, the market may not want us to sell at the number we want, so we have to be prepared to hold for a longer period of time,” he said. 

There is a boom in multifamily interest from investors shifting over to the segment from other asset classes, but Freed said there is still a lot of uncertainty in the segment. 

“I’m thoroughly convinced, the range of opinions is such, that no one really knows what is going to happen in the next 12 months,” he said. “I certainly don’t.”