Limited new supply, combined with continuing solid demand, is creating healthy performance for Oakland apartment properties in 2007.

“Someone might be reading about all the negative coverage in the media about the real estate market, but that’s coming from the residential side,” said Jerry Smith, regional manager of Marcus & Millichap’s Oakland office. “When you dig deeper, looking at rent growth, occupancy levels, where cap rates are, the demand for Bay Area real estate, fundamentally things are still relatively strong.”

Oakland climbed three notches to claim the No. 3 spot in Marcus & Millichap’s 2007 National Apartment Index. Employment growth and shrinking affordability in the single-family housing sector are producing strong renter demand in the metro area.

Employment in Oakland is expected to climb by 1 percent in 2007, or 10,100 positions. Assets located close to public transit hubs or in gentrified areas will continue to attract investor interest.

“Rent growth in San Francisco has been significant, and for people to work there, they have to be getting paid awfully well to be able to afford the rents that owners are asking,” said Smith. “A lot of East Bay markets are flourishing as a result of that spillover from rent growth.”

Solid fundamentals are bolstered by modest new multifamily construction that is primarily focused on the for-sale market, said Smith.

Sales transactions in Oakland are slowing as owners experiencing rent growth decide to hold their properties.

“In several Oakland markets, we are seeing a decrease in transaction volume between 30 percent and 40 percent in 2006 from 2005,” said Smith.

The vacancy rate in Oakland at the end of 2006 was 4.9 percent, according to Reis, Inc., a New York City-based real estate research firm. Average annual asking rent was $1,260 per month, a year-over-year increase of 5.4 percent.

The environment for turning rental stock into condos isn’t so positive.

“The condo conversion market has dried up in Oakland,” said Smith. “Owners are starting to realize that their price expectations can’t be as high as they would like.”

It may not make sense to buy a condo when renters can find luxury rentals. That’s the case with the eight-story Aqua Via, a newly constructed art deco-style building on the corner of Second and Madison streets in Oakland’s Waterfront Warehouse District. The building was constructed to luxury condo standards with high ceilings, 7-foot windows, stainless steel appliances, soundproofed walls, and energy-efficient glass. Amenities include a fitness center, on-site parking, a bocce ball court, a lobby attendant, and a 29-foot powerboat available for excursions on the Bay. Monthly rents at the 100-unit complex range from $1,495 for a 790-square-foot studio to $2,100 for a 1,327-square-foot two-bedroom unit. San Francisco-based Embarcadero Pacific Co. is Aqua Via’s developer. Former Mayor Jerry Brown has called the development “elegant density.”

“There is a growing acceptance among a larger and larger share of residents in the Bay Area for housing that is multifamily, urban in its orientation, and that is proximate to transportation that will get them to work,” Association of Bay Area Governments Planning Director Ken Kirkey told ANG Newspapers. “People don’t want to spend all day in a car going to and from work.”

On the multifamily front in San Francisco, climbing rents and high occupancy levels are driving the apartment market.

“Rents are climbing way up,” said Brad Lagomarsino, senior associate and a director of Marcus & Millichap’s National Multi Housing Group in San Francisco. “It’s an appreciation market. I think if rates stay where they are, we will continue to see San Francisco [being a] very healthy place with a lot of transactions. Buyers are in it for the long-term. There are very few flippers here.”

Lagomarsino said he had one apartment owner place a six-unit building on the market for $1.9 million. The property was snapped up in about a month for $2.2 million. Lagomarsino was amazed, he said, until another apartment building—again a six-unit development—sold for $3 million.

“The transactions are large, and that equates to small returns for buyers,” Lagomarsino said. “But, again, buyers are in it for the long-term.”

Year-over-year asking rents have increased 7.3 percent, according to research from Reis, Inc.

Although condominium developers remain fairly active in San Francisco, apartment construction is forecast to be limited to 650 units in 2007. Construction is expected to be concentrated in the South of Market submarket.

If interest rates remain stable and rents continue to grow, investors will continue to be drawn to San Francisco. Those interested in value-added opportunities may look to the North Bay and East Bay, where rent increases are only starting to occur. Smith said Oakland rents had been lagging from 2001 to 2005.