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San Francisco Apartment Market Shines

Multifamily rent growth in the Golden Gate City will lead the nation in 2008, thanks to a healthy economy and population growth driven by burgeoning professional and business services, according to a national forecast by real estate investment services firm Marcus & Millichap.

Due to a local economy that is thriving on technology companies and the businesses that serve them, developers in San Francisco have focused on office and for-sale housing construction rather than apartments, Marcus & Millichap researchers conclude in the company’s 2008 National Apartment Report. As a result, the market added just 750 multifamily units in all of 2007. That pace won’t pick up much this year either, with only 800 additional units expected to deliver in 2008.

To put that new supply in perspective, consider that San Francisco’s projected employment growth will bring another 10,200 workers on local payrolls this year. Those new workers must choose between apartments and one of the nation’s least-affordable housing markets, which is why forecasters expect renter demand to push the citywide vacancy rate down 30 basis points to 4% by the end of 2008.

Those improving fundamentals put pricing control squarely in the hands of San Francisco landlords, who have been slow to bring rent up to market rates in recent years. Asking rents will likely gain 7.8% this year to reach an average of $1,995 per month, Marcus & Millichap projects.

For investors, those swelling income streams will bring robust demand from private buyers who will be forced to forage among San Francisco’s depleted inventory of for-sale apartment properties for acquisitions, according to Linwood Thompson, senior vice president and managing director of the national multi-housing group at Marcus & Millichap. “Many investors remain willing to accept lower initial returns, currently averaging in the mid-3% to mid-4% range, as they expect to substantially increase revenues going forward,” Thompson writes in the 2008 National Apartment Report.

The promise of strong rent growth and robust investment activity moves San Francisco up seven spots to lead the nation in Marcus & Millichap’s annual National Apartment Index (NAI), a snapshot analysis that ranks 43 apartment markets based on a series of 12-month forward-looking supply and demand indicators. New York City moves down two places this year to No. 3. Seattle moved up five places to the No. 2 spot; San Jose climbed eight positions to the No. 4 slot; and Oakland holds the No. 5 position, down two places from last year.

The national picture is less sanguine. Apartment vacancy is expected to hold at 5.8%, according to Marcus & Millichap, but competition from single-family and residential condominiums being offered for rent by individual owners will hurt those markets where for-sale residential construction was most active in recent years. That shadow space is most pronounced in some Florida markets.

Across the nation, foreclosures in the single-family market will grow the renter pool and help to offset the extra supply created by shadow space. Asking rent will rise by 4%, Marcus & Millichap predicts. Even so, effective rent growth will be limited due to concessions that may be necessary to compete with shadow space for renters.

Developers are expected to add about 100,000 new multifamily units in 2008, up from 84,000 last year. Rents in many markets fail to justify new development, largely due to high land costs and increasing construction costs, according to Marcus & Millichap.

High construction costs are likely to creep higher this year, says Kenneth Simonson, chief economist at the Associated General Contractors of America. Reports of escalating project costs are proliferating, Simonson says, driven largely by diesel fuel that affects both transportation and jobsite machinery costs. The price of diesel is expected to peak near $3.50 per gallon this spring, according to the Energy Information Administration.

For a copy of Marcus & Millichap’s National Apartment Report and the complete NAI rankings, visit

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