Bay Area, CA Apartment Market: Gear Up for Outsized Growth after Pandemic

Updated: Sep 26, 2020


The chart above shows the Bay Area markets apartment fundamentals and drivers. This is the combined area of San Francisco, Oakland, and San Jose (SFR-OAK-SJO) apartment market fundamentals and their core drivers. The apartment market fundamentals and two drivers, job growth and net international and domestic migration for the three metro areas, are combined using sum/weighted average. Here, revenue growth is calculated using rent growth and annual change in occupancy.

The Bay Area metros cannot escape from the laundry list of negative publicity that almost all of the California metros go through. It is true that there is a high cost of living and doing business in the area with natural disasters like fires, mudslides, and earthquakes being quite common. With the recent trend of negative migration and pandemic driven recession, what are the expectations for the Bay Area apartment market?

Summary Explanation:

· Apartment Fundamentals: After the Great Recession through 2019, the Bay Area (SFR-OAK-SJO) apartment supply and demand remained balanced, as demand slightly outpaced supply by about 1,400 units. Revenue growth, annual change in rent plus occupancy growth, during that time (2011-2019) averaged over 5%. Depending on different data sources, annual average revenue growth in the area during the first half of 2020 stands anywhere from -5% to -8%. We are forecasting close to a 9% drop in revenue growth in 2020. By the end of 2022, we expect occupancy and rent to recover all lost growth rates, about a year earlier than the nation. From 2021 to 2026, annual average occupancy and rent growth is forecast to average 96.3% and 4.3%, respectively.

· Apartment Fundamental Drivers:

  • The major driver of apartment fundamentals, job growth, remained stable in the area from 2011-2019, supported by one of the strongest industry—Professional and Technical Services or Tech jobs. After the Great Recession to 2019, the area produced about 830 thousand jobs, or an annual average growth rate of close to 3%. About 70% of the time, movement in apartment occupancy and rent growth during that time was driven by job growth, and the rest was impacted by population growth, new supply, and single family market conditions. From 2021-2026, we are forecasting job gain to average about 83,000 or 2.3%, stable growth, but about 60 basis points lower than the last growth cycle.

  • Starting in 2015, the net domestic migration to the area turned negative, pointing to some businesses and people moving away from the area due to higher taxes and regulations. The cost of living and doing business remains a serious issue. However, loss of domestic population is replaced by above average international migration to the area. Furthermore, about 60% of the population in the area are below the age of 44 years old, which is the prime renter group. On the component of population change/growth, domestic and international migration is expected to cancel out, leaving birth and death as major drivers for the area during the six year forecast period.

· Conclusion: The year of COVID-19 or 2020 will be a transitional year not only for the Bay Area apartment market fundamentals, but for every metro in the U.S. Besides the drivers of apartment demand for the area, consider these factors as well:

  • The Bay Area markets are considered high beta markets, where higher volatility are common. During recessionary years, expect the area to lose outsized growth (like right now) but outperform with massive growth during recovery years (in 2021 and 2022). Investors in high beta markets must pay extra attention to the real estate cycle—since recovery is starting next year, gear up for high growth at least through 2025.

  • Issues surrounding taxes and regulations, impacting the cost of living and doing business in the area, have been in investors’ radar for over two decades. However, we keep seeing apartment investors put properties from these metros in their portfolios to get solid income and appreciation returns. It seems both investors and the general population are willingly disregarding natural disasters in certain months and paying higher taxes/regulations to enjoy the weather and topography of the Bay Area for the rest of the year.

  • Finally, after this year we are forecasting stable and healthy economic and apartment market fundamentals for the area. When weighing in negative and positive factors on a scale for the Bay Area’s economy and apartment market, positive factors win. This year will only be a transitional year with no large structural impact to the area’s economy and apartment market.

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