PROMISING PROPERTY: The 25-unit, luxury Station House #1, developed by Martin Building Co., is currently on the market and expected to fetch a high price.
Cavan Clark Photography PROMISING PROPERTY: The 25-unit, luxury Station House #1, developed by Martin Building Co., is currently on the market and expected to fetch a high price.

While the California economy struggles to find its footing following the state's well-publicized housing implosion, a high-tech renaissance is fueling San Francisco's multifamily rental market. 

Cloud-computing titan recently unveiled plans to construct a 2-million-square-foot headquarters in the city's Mission Bay district, where it will employ as many as 10,000 workers. Social micro-blogging giant Twitter has signed a significant headquarters lease of its own, committing long term to the South of Market neighborhood.

In the past two years alone, Bay Area–based technology powerhouses Apple and Google, among others, have drastically boosted their workforces (Apple by 76 percent, Google by 64 percent), adding thousands of new employees to local payrolls.

Owners of San Francisco multifamily assets have been major beneficiaries of this technology-led expansion, filling vacancies in a matter of days and lifting rents to stratospheric levels.

Rents within San Francisco grew nearly 15 percent in 2011, easily leading the nation, according to market research firm MPF Research. And MPF anticipates an additional 10 percent in rent growth through 2012 as insatiable demand for San Francisco apartments continues to outweigh anemic new supply. In fact, the San Francisco rental market will continue to tighten for years to come, with vacancies eventually dropping from today's 3.4 percent to an astounding 2.6 percent in 2015, forecasts market research firm Reis.

Investment Trends

Consistently ranked as one of the world's most sought-after investment markets, San Francisco draws the attention of commercial real estate capital providers from across the globe. Unimpressed with Treasury yields, uncomfortable with deploying significant capital into emerging markets, and under the gun to recapture losses accrued through the recession, institutional investors are increasingly betting on the safety and performance of San Francisco real estate. 

The nation's best apartment fundamentals, combined with a general lack of alternative investment options, have pushed local capitalization rates below 4 percent for core, trophy properties. “Per pound” pricing for newer, market-rate assets has exceeded $500,000 per unit in specific instances, and pro forma rents for new developments are being underwritten as high as $5 per square foot on smaller, market-rate floor plans.

On the development side, 2011 marked the mass awakening of many local builders. Though San Francisco development of any kind remains notoriously arduous, apartment developers are racing to add sufficient supply to match both current and projected rental demand.

Trinity Properties, led by local apartment legend Angelo Sangiacomo, is working through the 417-unit second phase of a 1,900-unit development along Market Street, while Miami-based developer Crescent Heights has broken ground on a 750-unit high-rise only blocks away. Household names Archstone, AvalonBay, BRE, Equity Residential, Mill Creek Residential Trust, and Wood Partners are all processing San Francisco development sites while aggressively scouring the city for additional opportunities. 

Yet while investor demand and development interest rival that of any market in the country, anticipated 2012 market-rate deliveries include only 308 units from San Francisco's Emerald Fund; 173 units from AvalonBay; and 290 units spread across two projects from local developer Martin Building Co. Such modest supply is unlikely to produce any meaningful impact on the market.

Market Drivers

San Francisco continually draws the attention of institutional investors for its deeply diversified employment base, prohibitive cost of homeownership, and general quality of life. 

The city's existing residential stock greatly benefits from massively restrictive geographic and political barriers to entry. Challenges in sourcing and entitling multifamily development sites are so severe within San Francisco's boundaries that the pricing of prime buildable parcels has been pushed north of $100,000 per unit in a handful of recent trades.

Though the for-sale housing market continues to struggle throughout most of the country, San Francisco's most desirable neighborhoods have seen 10 percent to 15 percent increases in housing prices over the past 12 months. Median home prices within San Francisco County have reached $745,000 and are anticipated to continue their upward momentum.

The robust return of private equity and venture-capital markets, as well as increased confidence in public markets, is further stoking the general Bay Area economy. A recent Goldman Sachs study lists 30 growing technology companies likely to hold significant IPOs in the near future, primarily for corporations, like Facebook, headquartered in the area. 

Prohibitive homeownership costs will continue to drive the rental market for the foreseeable future. The blistering technology sector will only add fuel to the fire, pushing rents and occupancies to record levels.

Based in San Francisco, Jordan Moss leads Jones Lang LaSalle's Northern California multifamily practice.

San Francisco At a Glance