Bay Area Rental Market Gives Tenants an Edge

San Francisco Ranked #1 in Marcus & Millichap National Apartment Index

Carolyn Said, Chronicle Staff Writer

Bay Area apartment rents will soften and vacancies will edge up in 2009, giving tenants more leverage, according to a forecast from an influential real estate firm.

Still, the rental market here will remain stronger than in most other regions around the country, said Marcus & Millichap Real Estate Investment Services, which issued forecasts for three metropolitan areas in the region: San Francisco , San Jose and Oakland .

“It’s clear that with job losses in 2008 and continuing in 2009, and a fair amount of competition from excess single-family homes and condos entering the market, 2009 will be a very challenging year for apartment owners,” said Hessam Nadji, managing director of research for the firm in its Walnut Creek office.

Those excess homes and condos, which M&M terms “shadow market rentals,” largely are bank-owned foreclosures purchased by investors who then rent them out. They are concentrated in the East Bay and some parts of San Jose , and are barely a factor in San Francisco .

“It will be more of a tenants’ market because of the higher vacancies and less pricing power” for landlords, Nadji said. “However, because the fundamentals of the rental market in the Bay Area are relatively healthy, even in the worst-case scenario, vacancies will be in the 5 to 6 percent range, which traditionally is considered a low vacancy rate.”

Here is a breakdown on the three metropolitan regions M&M considered.

San Francisco: The city is definitely healthy compared with elsewhere; in fact it ranks No. 1 in the nation in M&M’s National Apartment Index, an analysis of 43 metro markets.

M&M predicts that “effective” rents – which take landlord concessions, such as a free month’s rent, into consideration – will rise 3.3 percent to $1,897 a month by year’s end. It forecasts asking rents of $2,002 a month, up 3.5 percent. That compares with a torrid 10 percent growth in rental rates as recently as 2007.

Rents are calculated as an overall average for units of all sizes at professionally managed apartment buildings with at least 20 units.

The vacancy rate in San Francisco is expected to edge up to 4.5 percent in 2009, compared with 4.2 percent in 2008.

Oakland: The East Bay region, which comprises Alameda and Contra Costa counties, is the hardest hit by the foreclosure crisis and thus most likely to have “shadow rentals,” Nadji said.

The forecast said that effective rents will finish 2009 at $1,370 a month, up 2.5 percent. But Nadji thinks that prediction may need to be revised downward to a projected rent growth of zero or even rent declines in 2009.

“Job losses for Oakland have worsened,” he said. “Our expectation is that rent growth for 2009 may not materialize there.”

The vacancy rate is expected to hit 6.4 percent in 2009 – the highest of the three Bay Area markets – compared with 5.6 percent in 2008.

San Jose: A sluggish tech sector is likely to weigh on Santa Clara County in 2009, M&M said. Effective rents will edge up just 1.5 percent to $1,652 a month. The vacancy rate is expected to be 5.6 percent, up from 4.9 percent in 2008.

Even though the economic crisis gripping the nation is more serious than anything seen in decades, Nadji said the impact on Bay Area rents will not be as severe as that of the dot-com crash.

“The last time we had a significant downturn in the market, in 2001-2004, the Bay Area was coming off an exceptional boom because of dot-com jobs,” he said. “There were virtually no vacancies in apartments. When those jobs began to go away, the degree of losses was severe. Even though this is a serious economic downturn, the Bay Area did not have the same kind of excess job growth leading up to it. The kinds of significant reversals of rents we saw in that last downturn is not expected to be repeated in this downturn.”

Apartment outlook

Marcus & Millichap predicts that rents will only edge up this year while vacancy rates will slightly increase. Its forecast looks at professionally managed apartment buildings with at least 20 units. Rents are calculated as an overall average for units of all sizes and take landlord concessions into consideration.

Area Rent forecast Vacancy forecast Construction forecast
San Francisco $1,897 (up 3.3%) 4.5% 400 units to be completed

versus none in 2008

San Jose metro

( Santa Clara County )

1,652 (up 1.5%) 5.6 175 units to be completed

versus 900 in 2008

Oakland metro

(Alameda/Contra Costa counties)

1,370 (up 2.5%) 6.4 1,000 units to become available

versus 1,400 in 2008

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