Frothy MF Climate Prompts Downturn Debate

SAN FRANCISCO – With a frothy market in place, multifamily developers, investors and brokers are watching carefully for signs of a downturn. This condition is due to sustained job growth, bringing about some of the highest rental rates in the country. And, the abundance of technology workers with healthy salaries continue to demand top-tier multifamily assets in key locations such as the Bay Area.

For now, developers are bringing new, high-end properties to market while simultaneously repositioning Class C assets, performing condo conversions and creating microunits to meet this demand. Investors are bullish on San Francisco, undeterred by all-cash bids and high prices with among the lowest cap rates in the nation. During a multifamily property panel at RealShare Bay Area this week, key experts assessed the state of this hot property type and weighed in on whether such bold expectations are truly warranted and how long they will last. The panel consisted of Yat-Pang Au, founder/CEO of Veritas Investments; Laurie Morfin, SVP; Bellwether Enterprise; Lydia Tan, SVP, Bentall Kennedy; Clinton Textor, vice president of investments, Marcus & Millichap and moderator James Kilpatrick, president NAI Northern California.

To remain competitive, lifestyle trends of upgrading interiors to reflect green methods, Zipcar hosting and collaborating with retailers are being implemented. Some units include Nest thermostats, laundry monitoring/DryerBro app connectivity, Uber convenience and DoorDash restaurant delivery.

Renters are looking for neighborhood vibes and personal connectivity, so microneighborhoods and downtowns are being sought out by developers. In addition, companies are uncovering talent-rich pockets in cities around the Bay Area, such as Oakland/Rockridge and San Jose.

“The brain trust is being followed by employers, rather than the other way around,” Au said. “The location of real estate is a competitive weapon.”

Affordable housing continues to be an issue in the Bay Area, as Kilpatrick pointed to 35% to 40% rent-to-income-ratios getting into a danger zone, while cost to rent versus owning and underwriting proforma rents are other issues multifamily industry insiders continue to grapple.

In the longer term, a market shift is never far from the minds of CRE professionals, and Kilpatrick proposed a definition of a downturn as three consecutive quarters. The experts accepted this as a common timeframe and all agreed the Bay Area has approximately three to four years left in this cycle. Textor cited increasing interest rates and pointed to the current lack of inventory, warning that a downturn will be sudden. Au agreed, citing interest rate risks and global uncertainty as indicators of changes afoot. Tan observed that a significant tech movement would indicate a downturn.

“There is a fundamental relationship of cap rates and interest rates working together,” Tan said.

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