A Window of Opportunity in the San Francisco Bay Area
Q&A with Adam Levin, Executive Managing Director, and Robert Johnston, Senior Managing Director, of Levin Johnston Group of Marcus & Millichap
Q: Is the Bay Area in a correction?
A: On the residential purchase side, one could argue that the Bay Area is in correction. Single-family housing prices in San Francisco have dropped more than 17% in April compared to last year, according to RedFin. On the multifamily side of the market, deacceleration or stabilization might be better terms. Deal flow has slowed in comparison to the peak of 2022, but following a slow start in Q1 2023, buyer activity has increased with a substantial uptick in multifamily investment deals closing in the area.
In terms of fundamentals, net absorption of new units and vacancy rates are in line with the extremely high demand for rentals. According to Marcus & Millichap research, vacancy rates in San Jose remain near historical lows at 4.4% in Q1. Per unit sales prices in both San Jose and San Francisco have nudged upwards. Volume is still down, but there has been an emphasis on lower-tier buildings with fewer units, providing significant opportunities for multifamily investors.
Q: How is the Bay Area multifamily real estate fairing so far this year?
A: The Bay Area market remains resilient. Transaction volume has picked up despite the challenging market conditions and investors are actively pursuing well-positioned acquisitions. For example, in March we were able to close a total of 9 multifamily transactions in the Greater Bay Area and have maintained similar consistency through Q2.
Deals are getting done, but not all brokers can operate in this market with the current headwinds. It takes a strong network, effective banking and client relationships, and the ability to identify the right properties to connect with qualified buyers. With more than 30 years of experience in the Bay Area, our established network and collaborative approach enables us to strategically transact for our clients on both the buy and sell side.
Q: Are you concerned about the economy for the rest of 2023?
A: The media are consistent with doom and gloom messaging for the real estate market this year. We have concerns, but don’t believe there has to be a negative spin to the economy. Interest rates are high and will probably stay high for some time, which will keep the brakes on the market without bringing it to a halt.
Buyers in the Bay Area are active, and sellers are progressively adjusting their expectations to meet the new market demand. Deals are coming to fruition, albeit at a slower pace than we experienced over the past two years. Both buyers and sellers need to take their time with any transaction. First, to understand the value that’s available in any deal and second, to structure it the right way – which will probably entail longer time horizons and less leverage.
Q: When do you see a recovery?
A: Historically, following past market slowdowns, the Bay Area has been one of the fastest markets to recover across the country. Employment overall is still growing. And the tech industry that is a driver of much of the rental market will expand again soon.
Windows of opportunity are highly scarce for this area and when they happen, they don’t last long. The time to profit from a challenging market is before the recovery. We might see the market loosening up more moving into 2024 as the interest rate environment stabilizes, or even comes down a bit, and the massive flow of maturing multifamily loans works it way through the system – data provider CREDiQ estimates there’s $75 billion in multifamily loans coming due in 2023-2024.
We believe the region’s strong multifamily fundamentals ensure its appeal as a long-term investment. Savvy investors will be taking advantage of the deceleration to capitalize on current opportunities and achieve optimal success throughout the recovery.