Bay Area apartment market slowly thawing this spring

Rents are still down from pre-pandemic highs across much of the Bay Area, but agents report that even with interest rates unchanged there has been a gradual spring thaw of the apartment market. 

It’s a “very, very slow recovery” thus far in San Francisco, according to Brad Lagomarsino of Colliers, but it could pick up quickly if the Fed lowers interest rates a little and the city continues along its more moderate political trajectory.

“We all need the pendulum to move more towards the middle and San Francisco becomes very, very viable again and very interesting to institutional investment and also private client investment,” he said. 

There were only 40 multifamily sales with more than 10 units in the city last year, he said, but half of them took place in the fourth quarter. Early spring was slow, as usual, but in March he had two multifamily listings that attracted multiple offers, which he hasn’t seen in years. 

The buyers are largely private equity and family offices, as well as 1031 exchanges, he said, with muted interest from institutional buyers, with the exception of the Brookfield-Ballast deal to buy nearly $1 billion in debt on 76 buildings formerly owned and run by Veritas that Brookfield foreclosed on in January. 

These private buyers “sensed the market had bottomed out towards the end of last year and committed to buying in San Francisco,” Lagomarsino said.

East Bay

The same trend is playing out across the Bay Bridge in the East Bay, where agents say institutional money has been absent and private investors have come to fill the void as sellers get more realistic on their pricing. 

“There’s definitely people ready to deploy capital if they find deals that make sense,” said Shivu Srinivasan at Transwestern.

There are “lasting scars” from the pandemic in East Bay markets like Oakland and Berkeley, he said, which means more demand for suburban and garden-style properties in upscale suburbs further out in Walnut Creek, Lafayette, Pleasanton and Livermore.

East Bay apartment sales recorded $614 million in deal activity during 2023, the lowest level since the aftermath of the financial crisis in 2011, according to Transwestern data. But the Bay Area always bounces back, Srinivasan said, and the mostly local buyers that he has seen know that.

“It’s hard to see the light at the end of the tunnel now, but in 2013 or 14 people were kicking themselves for not buying in 2010,” he noted. 

The price per unit in the East Bay was down by a quarter compared to 2022, according to Transwestern, and agents agreed that as more deals have closed at lower price points, buyers have become more realistic. 

“A couple of years ago you’d be delivering very bad news telling someone their property is worth 30 percent less,” said Matthew Flaherty of Colliers. “They’d be like, ‘Well, that’s not what the market says.’ Now you can finally say, ‘Well, actually it is.’”

Market direction

Flaherty expects relatively flat pricing for the next six to 12 months, and said he has seen “a new cast of characters” made up largely of private capital come into the market to take advantage of the opportunity. 

The Peninsula has significantly more demand from renters and has more land constraints, so it has therefore held its value better than the East Bay, the agents said. The same is true of Southern Marin, Faherty added. Apartments in those areas still have cache and don’t trade often. They are also interesting investment vehicles for the high-net-worth individuals who already live there, he said.

Given the down market, anyone who doesn’t need to sell now is trying to wait out the market, banking on an eventual recovery. But many long-time mom and pop owners have had enough of the increased regulation and operating costs — particularly insurance — combined with down rents, which is “why you’re seeing so many long-term families head for the exit,” Lagomarsino explained.

“At this point I am doing nothing but opinions of value for families that want out of San Francisco,” said Lagomarsino. “It’s kind of absurd.”

It’s going to take a “sophisticated” buyer to deal with both the tenant-friendly and extremely complicated regulations and the onerous task of upgrading a 100-year-old building that may look gorgeous but likely needs a lot of fixes when you look under the hood, he said. 

“It’s almost like a vintage car — beautiful to look at, but Jesus Christ they’re expensive to run,” he said.

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