Bay Area Rental Market

Wednesday, January 21, 2009
Carolyn Said
San Francisco Chronicle

Bay Area apartment rents will soften and vacancies will edge up in
2009, giving tenants more leverage, according to a forecast from an
influential real estate firm.

Still, the rental market here will remain stronger than in most other
regions around the country, said Marcus & Millichap Real Estate
Investment Services, which issued forecasts for three metropolitan
areas in the region: San Francisco, San Jose and Oakland.

"It's clear that with job losses in 2008 and continuing in 2009, and
a fair amount of competition from excess single-family homes and condos
entering the market, 2009 will be a very challenging year for apartment
owners," said Hessam Nadji, managing director of research for the firm
in its Walnut Creek office.

Those excess homes and condos, which M&M terms "shadow market
rentals," largely are bank-owned foreclosures purchased by investors
who then rent them out. They are concentrated in the East Bay and some
parts of San Jose, and are barely a factor in San Francisco.

"It will be more of a tenants' market because of the higher
vacancies and less pricing power" for landlords, Nadji said. "However,
because the fundamentals of the rental market in the Bay Area are
relatively healthy, even in the worst-case scenario, vacancies will be
in the 5 to 6 percent range, which traditionally is considered a low
vacancy rate."

Here is a breakdown on the three metropolitan regions M&M considered.

San Francisco: The city is definitely healthy
compared with elsewhere; in fact it ranks No. 1 in the nation in
M&M's National Apartment Index, an analysis of 43 metro markets.

M&M predicts that "effective" rents - which take landlord
concessions, such as a free month's rent, into consideration - will
rise 3.3 percent to $1,897 a month by year's end. It forecasts asking
rents of $2,002 a month, up 3.5 percent. That compares with a torrid 10
percent growth in rental rates as recently as 2007.

Rents are calculated as an overall average for units of all sizes at
professionally managed apartment buildings with at least 20 units.

The vacancy rate in San Francisco is expected to edge up to 4.5 percent in 2009, compared with 4.2 percent in 2008.

Oakland: The East Bay region, which comprises
Alameda and Contra Costa counties, is the hardest hit by the
foreclosure crisis and thus most likely to have "shadow rentals," Nadji
said.

The forecast said that effective rents will finish 2009 at $1,370 a
month, up 2.5 percent. But Nadji thinks that prediction may need to be
revised downward to a projected rent growth of zero or even rent
declines in 2009.

"Job losses for Oakland have worsened," he said. "Our expectation is that rent growth for 2009 may not materialize there."

The vacancy rate is expected to hit 6.4 percent in 2009 - the
highest of the three Bay Area markets - compared with 5.6 percent in
2008.

San Jose: A sluggish tech sector is likely to weigh
on Santa Clara County in 2009, M&M said. Effective rents will edge
up just 1.5 percent to $1,652 a month. The vacancy rate is expected to
be 5.6 percent, up from 4.9 percent in 2008.

Even though the economic crisis gripping the nation is more serious
than anything seen in decades, Nadji said the impact on Bay Area rents
will not be as severe as that of the dot-com crash.

"The last time we had a significant downturn in the market, in
2001-2004, the Bay Area was coming off an exceptional boom because of
dot-com jobs," he said. "There were virtually no vacancies in
apartments. When those jobs began to go away, the degree of losses was
severe. Even though this is a serious economic downturn, the Bay Area
did not have the same kind of excess job growth leading up to it. The
kinds of significant reversals of rents we saw in that last downturn is
not expected to be repeated in this downturn."

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