Multifamily experts cautiously optimistic about Bay Area’s future

Some of the biggest names in the apartment industry said they have reason to feel cautiously optimistic about the future of multifamily investment in the Bay Area.

Top brass from Grosvenor, AvalonBay, Cityview, Veritas and more spoke at the Bisnow Multifamily and Affordable Housing Conference in San Francisco on Feb. 13. Many said that while the city and the greater macroeconomic picture has its challenges, the combination of an educated workforce, appealing weather, high-paying jobs, a culture of innovation and top-notch universities would bring investors back to the Bay. 

“It kind of feels like 2011,” said Mike Kim, senior managing director of development for Mill Creek Residential. “All the indicators were still lousy, the market was still terrible, but equity started coming out and started engaging and started talking and started to threaten to invest again all of a sudden.”

Aaron Reuter, senior vice president of investments at Veritas, had a surprisingly upbeat take, given that the firm formerly known as San Francisco’s largest landlord recently lost ownership of one-third of its portfolio in the city after defaulting on about $1 billion in loans. 

“We’re gonna be back. It’s gonna be awesome,” Reuter said in response to a question about where the city would be in five years, eliciting cheers and applause at the event attended by a few hundred people and held at the InterContinental Hotel in SoMa. “We’ve seen it before and we’ll see it again. Buckle up, I think it’s going to be a wild ride.” 

Buyers’ perspective

Rents in San Francisco are still at or below pre-pandemic rates and a one-month concession is the norm on new leases, other than in the hottest neighborhoods, he said. But owners who were holding firm on their higher pricing for the last 18 months are starting to shift their mindsets just as institutional investors are rediscovering the city. 

He said Veritas would be buying both the mom-and-pop-owned buildings it has specialized in acquiring historically, as well as distressed sales to add substantially to its inventory “in a pretty short period of time.” 

“The level of distressed debt that we’re seeing in our local market continues. Obviously, we were a part of that last year,” he said. “We’re getting a lot of inbound interest who want to take a look at San Francisco, like, hey, this is the right time to get in.”  

He said a switch has been flipped in renter demand in 2024 as well, with leasing ahead of what the company had budgeted for and vacancy rates within 300 basis points of the firm’s pre-pandemic norm of about 95 percent. 

Kim said that while it’s never wise to count the city out, the high office vacancy rate was a source of major concern. Of the 63 closings his company took part in last year, “zero” were in the Bay Area.

“When I do the math in San Francisco, it doesn’t look good,” he said. “The formula is this: butts in cubicles means heads on beds.” 

Angela Biggs, managing director for investment at Grosvenor, said that she was worried about the normalization of the three-day in-office work week, and that the city had to do more to encourage a “dynamic” downtown that would draw people back.

For Biggs, politics are the major “X factor” for the city’s recovery. Nationally, she said, political pressure ahead of the November election might bring interest rates down, which would be a huge help, but she had concerns about possible trade wars and general “geopolitical risk” if Donald Trump wins a second term. 

Locally, she encouraged everyone in attendance to vote for San Francisco’s Proposition C, which eliminates the transfer tax on office-to-residential conversions. She said the measure would be “one tool of many that we need to use” to convert “obsolete buildings” into much-needed housing. 

Affordable money hunt

Politics and increasing funding sources were also a hot topic during a panel discussion on affordable housing, with owner-operators from Bridge Housing, EAH Housing and Avanath Capital among those calling for the simplification of an onerous process laden with additional requirements that can add 30 percent or more to the cost of building affordable units. 

“I’ve had a project that had 12 funding sources and each one of those sources comes with its own strings and rules that we have to follow,” said Bianca Neumann, director of development in Northern California for EAH Housing.

These “soft funding sources” are not only oversubscribed at a rate of 10 to one, they also need to be reapplied for every year as the project waits in limbo, said Smitha Seshadri, executive vice president at Bridge. She described a Fruitvale infill project that Bridge began working on in 2016. It just received its temporary certificate of occupancy last month.

“If it’s going to take us six, seven years to produce one 200-unit project at a time, you can see how the system is not really working,” she said. 

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Little fixes will do little to move the needle on the Bay Area’s housing crisis, the panelists agreed. Large-scale changes like doubling the number of housing vouchers, and funding with predictability and without extra requirements, were just a few of the overhauls on their wish lists. 

In addition, the tax credit system that provides the backbone of affordable housing’s capital stack was created in the 1980s and is woefully outdated, they said. 

“We’re trying to reinvent the buggy business in a world of electric driverless cars,” said Daryl Carter, CEO of Avanath.