Marcus & Millichap

Bay Area Multifamily Market Report

Fourth Quarter 2018

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Sharp Contraction in Completions Highlights Extreme Housing Shortage in Bay Area

Completions tumble, allowing rents to reaccelerate. The robust Bay Area metros, underpinned by tremendous growth in the innovative tech, semiconductor and biotech industries, has generated unemployment rates matched only by the late 1990s. Household formation has surged, yet a lack of housing, primarily multifamily units, has pushed vacancy to extremely low levels. Additionally, household bundling has become increasingly prevalent, a trend set to accelerate as development slides roughly 30 percent regionwide. As construction falls, rental rates have stabilized and reaccelerated as tenants vie for the limited number of remaining apartments still available. Rent growth will be most pronounced in commuter locations in second- and third-tier suburbs, where the rental rate remains below the metro average.

Midterm elections, potential rent-control changes, 2019 multifamily pipeline driving market sentiment. Amid several potential legal and political changes in the midterm elections, investors are allocating toward long-term holdings, although some cautious sentiment has emerged recently. The sharp slowdown in construction has prompted significant price appreciation, allowing investors to reposition portfolios toward areas showing significant tenant and rent growth. As the development pipeline builds back up in 2019, opportunities for new construction will create some market dislocations, prompting investors to ensure leasing and portfolio maneuvers are accomplished through the remainder of 2018.

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