After the wild ride of recent years, it may be hard to remember exactly what "normal" is in the San Francisco Bay area housing market. Let's take a refresher course. Before the dot-com bubble, the mature Bay area economy typically produced additional jobs at a fairly modest pace. Total housing production was limited, too, constrained not just by the relatively slow household growth rate but also by some of the nation's most extreme barriers to new building in terms of land availability and especially development costs. From that perspective, the region certainly appears to be entering a period when the housing market performance is returning to the long-term patterns seen historically.

Still, evolution of the Bay area housing scene is easy to spot. In one of the most notable trends, multifamily homes are playing an increasingly important role. The region isn't experiencing the run-up in single-family home construction seen in most other parts of the country. In fact, while building authorizations in the single-family sector dropped 11 percent in the 12 months ending March 2005, multifamily starts jumped 20 percent, with apartments and condominiums now accounting for nearly half of ongoing total housing development. There's just not enough land available in the Bay area for single-family building to reach especially large volumes, and furthermore, much of the population can't afford the region's high single-family home prices.

Evolution also is occurring in the character of the Bay area's multifamily housing product. Many of the projects under way are condominiums, with the East Bay town of Emeryville providing a good illustration of the region's condo mania. For apartments, the big story is transit-oriented development. Several high-density properties that combine apartments and retail space within steps of a rail stop are in the works, and more than half of the region's apartment construction actually is occurring no more than a few miles from a mass transit station.

After the Gold Rush

Employment in the San Francisco, Oakland, and San Jose metros totaled just more than 2.8 million jobs as of spring 2005. That figure is down roughly 460,000 jobs from its 2000 peak, but the good news is that growth has returned, with about 3,000 jobs added in the past year. The tech and finance sectors that form so much of the total employment base are expanding modestly and appear to be positioned for stronger growth. Overall economic expansion, however, is held back from a healthier rate by an ailing government sector, particularly local school districts which must cut significant jobs to balance their budgets. Most economists are forecasting total employment growth in the Bay area to pick up appreciably to some 35,000 to 45,000 jobs by late 2005 to early 2006.

CABLE CAR CULTURE: Commuters who live in San Francisco will be increasingly relying on mass transit.
CABLE CAR CULTURE: Commuters who live in San Francisco will be increasingly relying on mass transit.

Meanwhile, San Francisco Bay area apartment occupancy has been inching upward for more than two years. The spring 2005 occupancy rate reached 96.3 percent, up 2.4 points from the bottom performance of just less than 94 percent in 2003. While occupancy reached 98 percent during the late 1990s-early 2001 frenzy, today's 96.3 percent occupancy rate actually is within a percentage point of full occupancy by long-term historical standards.

Rents, on the other hand, still have a way to go. The typical apartment community in the Bay area suffered a 35 percent cut in effective rents between 2001 and the end of 2004, before rates began eking up in 2005. Still, the year-over-year increase as of spring 2005 was less than 1 percent. Average rents now stand at $1,341 per month, or $1.624 per square foot.

With Bay area apartment occupancy tightening, the region should be positioned to experience strong rent growth once again, assuming that single-family home values remain astronomical. During the same time as apartment rents faltered by 35 percent, the median price of a single-family home shot up 42 percent and now stands at $656,700, according to the National Association of Realtors. This makes the premium to buy versus rent housing in San Francisco one of the steepest in the country.

San Francisco's urban core has led the comeback for the Bay area apartment market. Occupancy has climbed to 97.4 percent in the SoMa (South of Market) district and 96.3 percent in the Marina/North Beach/downtown zone. Furthermore, these two locales already are experiencing meaningful rent inflation, with effective rates up about 4 percent on an annualized basis as of spring 2005. Desirable lifestyle characteristics have made a big impact on the performances in these neighborhoods, which were able to attract renters from other portions of the region as for-lease options became more affordable in recent years.