Oakland Multifamily Market Report

Development Fills; Equity Inflows Enter in Torrents - Written by Marcus & Millichap - Posted Oct 4, 2016

dsc_0747Economy gathers steam, driving occupancy and rents up. The East Bay multifamily market is teeming with renters as the high cost of homeownership and continued economic expansion intensify demand for metro apartments. Corporate relocation as well as organic business growth are creating job opportunities in well-paid employment sectors, drawing highly skilled workers to the metro. Additionally, Oakland offers the most affordable rents in the Bay Area, attracting value-seeking renters. As a result, demographic metrics signal continued success with the rates of household formation and population growth well above the national level, particularly for those age 20 to 34. The pace of development has not been able to match the need for new space, leaving Oakland facing a hosing shortage. At $805,000 in June, the median price of a single-family home is more than triple the national level and rising with many residents opting for rentals over homeownership. Multifamily development will ramp up to alleviate the demand-side pressure and 2016 marks the strongest year of building on record. Although construction is high, the threat of overbuilding has yet to materialize with vacancy contracting to one of the lowest levels in the country. These tight market conditions will spur another year of solid rent growth.

Market stability and upside spur trading activity; yields trend lower.
Historically low interest rates and a highly optimistic economic outlook continue to drive capital into the East Bay apartment market. Many investors seeking security and capital appreciation prospects will bid aggressively for available assets, igniting deal flow, particularly in the Oakland core. This intense buyer demand coupled with easy access to acquisition financing have driven apartment valuations to unprecedented levels, putting tremendous downward pressure on cap rates. The average first-year return has fallen well below the pre-recession low with assets usually changing hands in the low-5 percent range. Well-located properties will see yields fall to the low- to mid-4 percent territory.

2016 Multifamily Forecast

Employment: Steady hiring in the public and private sectors will expand the workforce 2.5 percent in 2016, an increase of 27,600 jobs. An employment gain of 30,000 workers was registered last year, led by hiring in the trade, transportation and utilities sector.

Construction: In 2016, builders will complete nearly 2,580 units, the vast majority of which will come online in the second half of the year. Although construction is historically high, the size of the market and intensity of demand will help the metro absorb the newly delivered units.

Vacancy: Following a 10-basis-point rise in 2015, the metrowide vacancy rate will fall 30 basis points to 2.5 percent in 2016. Net absorption will hit the highest level since 2000 this year with more than 3,120 units to be absorbed.

Rents: The average effective rent surged 10.2 percent last year as tight market conditions and a growing economy encouraged hikes. Rent levels will jump 7.4 percent in 2016, reaching $2,146 per unit by year end.

Source: Marcus & Millichap

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