SanFran_4Q11Apt

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M A R K E T R E P O R T

ApartmentResearch

San Francisco Metro Area Fourth Quarter 2011

Tech-Driven Renter Demand Fueling Apartment Shortage

Renter demand growth in the San Francisco apartment market continues to intensiy, ed by booming tech-sector job creationand sot housing market conditions widening the pool o prospective tenants. Rapid payroll expansion in the regions tech industryhas stiened competition or available rental units in preerred in-city neighborhoods. Tis shortage o housing in San FranciscoCounty has consequently led to spillover demand in the communities on the peninsula, particularly those located near growingtech-startup employers. Te markets broad-based upswing in renter demand has propelled the regions apartment sector into anaggressive rent ination period, with local landlords raising rents at one o the nations astest rates in the third quarter. In 2012,additions to stock will increase slightly, but bullish demand stemming rom urther job creation and displaced homeowners willpreserve a supply/demand balance that leans in avor o owners. As such, metrowide rents are likely to top previous highs by theend o next year, which will restore revenue growth to levels posted ahead o the recession.

With the local economy on solid ooting and rents rising sharply, the pool o investors targeting apartment properties in theSan Francisco marketplace continues to deepen. Core assets are generating multiple oers when listed, particularly those in north-ern neighborhoods, where cap rates or top-tier properties average in the mid-4-percent to low-5-percent range. Although SanFrancisco County still accounts or the bulk o metrowide transactions, sales velocity across San Mateo County has built momen-tum, and cap rates or the peninsulas best-in-class assets are relatively in line with those in the city. With the operating landscapestrengthening across the market, high-net-worth buyers will increasingly consider suburban assets next year, particularly those neartech hubs along Highway 101. At the lower-end o the spectrum, the metros smaller, lesser-quality assets are generally clearing themarket with cap rates in the low-6-percent range.

2011 Annual Apartment Forecast

Employment: Marketwide employment levels will expand by 16,000 positions this year, a 1.7 per-cent increase and an improvement rom 2010, when 6,100 positions were added.

Construction: One market-rate apartment complex containing 76 units is slated to come onlinein 2011, which is down rom the addition o nearly 870 units in 2010. Over the past fve years,completions have averaged 560 units annually.

Vacancy: Apartment vacancy in San Francisco will decline 90 basis points in 2011 to 3.4 percent,ollowing a 50-basis-point drop last year.

Rents: During 2011, asking rents in the San Francisco apartment market will inate 4.6 percent to$1,883 per month, while eective rents spike 5.1 percent to $1,799 per month.

1.7%increase in

totalemployment

76units

will becompleted

90 basispoint

decrease invacancy

4.6%increase in

askingrents


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*

Year-over-YearC

hange

Metro Area

United States

Employment Trends

* ForecastSources: Marcus & Millichap Research Services, BLS, Economy.com

08 09 1007 11*

*

*

* -

* -

-6%

-3%

0%

3%

6%

*

Metro Area

United States

*

MedianExistingHomePrice(Y-O-YChg.)

Home Price Trends

*

*

* -

* Trailing 12-Month PeriodSources: Marcus & Millichap Research Services, Economy.com, NAR

08 09 1007 11*-30%

-20%

-10%

0%

10%

NumberofUnits(thousands)

Construction Trends

0

1

2

3

4

08 09 10 11*07* ForecastSources: Marcus & Millichap Research Services, U.S. Census Bureau

*

Apartment Completions

Multifamily Permits

*

*

* -

* -

Economy San Francisco employers increased payrolls by 13,200 jobs through the frst three

quarters o 2011, a gain o 1.4 percent, outpacing the creation o 9,400 positionduring the corresponding period last year.

Te metros proessional and business services sector is leading growth, as 10,100

workers were added to payrolls this year, ollowed by the creation o 2,300 spotsin the other services segment.

Te manuacturing, education and health services and trade, transportation andutilities sectors were the only three industries to post job cuts this year, shrinkingby a combined 4,300 jobs year to date.

Outlook: Marketwide employment levels will expand by 16,000 positions thisyear, a 1.7 percent increase and an improvement rom 2010, when 6,100 posi-tions were added.

Housing and Demographics Single-amily home builders obtained permits or 350 residences over the past

year, down 10 percent rom year-earlier levels. Multiamily developers, on theother hand, secured permits or 1,810 units, which is up more than twoold romthe number issued in the preceding year.

Te median price o an existing single-amily residence reached $711,400 in thethird quarter, 4 percent less than the third quarter o last year. During that sameperiod, the median household income in San Francisco increased 1 percent to$82,070 annually.

Using traditional lending standards, the monthly mortgage obligation or a median-priced residence in the metro is $1,500 higher than the average Class A askingrent, compared with a divide o $1,840 per month a year ago.

Outlook: Despite alling values, home prices in San Francisco remain among thehighest in the nation, which will limit the number o residents capable o ownership as uncertainty surrounding the housing sector wanes.

Construction Only 76 market-rate rental units were delivered to the metro over the past year

ollowing the addition o 1,127 units brought into service one year earlier.

Fewer than 600 market-rate apartment units were under construction by theclose o the third quarter, most o which are slated or delivery in 2012. In theor-sale multiamily arena, roughly 390 condo units were delivered during theyear ending in the third quarter, while another 700 units are under way.

Te planning pipeline, meanwhile, consists o 7,660 rental units, representing a5.6 percent o existing stock. More than 8,460 or-sale units are under consideration, though a limited number o the planned projects contain start dates.

Outlook: One apartment complex containing 76 units is slated to come onlinein 2011, which is down rom the addition o nearly 870 units in 2010. Over thepast fve years, completions have averaged 560 units annually.

page 2 Marcus & MillichapuApartment Research Repor


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*

*

VacancyRate

Metro Area

United States

2%

4%

6%

8%

10%

Vacancy Rate Trends

* ForecastSources: Marcus & Millichap Research Services, Reis

08 09 1007 11*

*

* -

* -

*

*

Asking Rent

Effective Rent

*

Year-over-YearChange

Rent Trends

* ForecastSources: Marcus & Millichap Research Services, Reis

08 09 1007 11*

* -

* -

-12%

-6%

0%

6%

12%

*

* *

*

MedianPriceperUnit(thousands)

Sales Trends

$130

$155

$180

$205

$230

08 09 10 11*07

* Trailing 12-Month PeriodSources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

* -

Vacancy Payroll growth and minimal supply-side pressure drove down the average apart-

ment vacancy rate 120 basis points over the past year to 3.5 percent in the thirdquarter, as net absorption totaled roughly 1,850 units. During the preceding year,the metros vacancy ticked up 10 basis points.

In the Class A sector, accelerated renter demand or high-end units supporteda 140-basis-point decrease to 4.3 percent. One year earlier, the average top-tiervacancy rate dipped 10 basis points.

Lower-tier rental demand also intensifed over the past year, causing vacancy toretreat 90 basis points to 3.1 percent. Class B/C vacancy rose 30 basis points overthe preceding 12-month stretch.

Outlook: Apartment vacancy in San Francisco will decline 90 basis points in2011 to 3.4 percent, ollowing a 50-basis-point drop last year.

Rents

Te average apartment asking rent climbed 4.1 percent over the past 12 monthsto $1,855 per month, while eective rents appreciated 4.7 percent to $1,769 permonth. As a result, marketwide concessions retreated by an average o two daysduring that stretch.

A steep rise in Class A occupied stock supported a 4.9 percent spike in askingrents at high-end complexes over the past year to $2,221 per month. Class B/Casking rents rose 3.2 percent year over year $1,550 per month.

Te combination o accelerated rent growth, the removal o leasing incentivesand robust occupancy gains drove up average property revenues 6 percent in thepast year. In the preceding year, revenues slipped 1 percent.

Outlook: During 2011, asking rents in the San Francisco apartment market willinate 4.6 percent to $1,883 per month, while eective rents spike 5.1 percent to$1,799 per month.

Sales Trends** Apartment sales velocity in the San Francisco metro accelerated nearly 60 percent

over the past year, aided, in part, by banks releasing assets rom their books.

Te median price o properties sold over the past year ell 5 percent to $183,300per unit, largely due to the disposition o bank-owned assets and portolios con-taining older properties.

Cap rates or best-in-class deals in the city averaged in the mid-4-percent to low-5-percent range over the past year, while lower-tier assets traded with frst-yearreturns in the 6 percent range.

Outlook: Given the metros stature as one o the nations top-perorming apart-ment markets, investor competition or local assets will remain ferce into 2012.

Although the disposition o reclaimed assets will provide opportunities or buyersto expand their local portolio, assets brought to market will garner multiple o-ers, requiring investors to stretch or deals.

Marcus & Millichapu Apartment Research Report

** Data reect a ull 12-month period, calculated oa trailing 12-month basis by quarter


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Capital MarketsBy WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Increased Fed intervention, such as Operation wist, should keep interest rates relatively low through the end o the year. As o late-October, the yield on the 10-yearreasury was hovering around 2.3 percent, approximately 175 basis points below the10-year average.

Apartment mortgage originations more than doubled in the frst hal o 2011 whencompared with the same period last year, driven largely by agency lenders FannieMae and Freddie Mac, lie insurance companies and local/regional banks. Whileagency originations increased over past year, the re-emergence o lie companies andbanks caused their market share to drop rom 62 percent in 2010 to 44 percent inthe frst hal.

Lenders view apartments as preerred assets and are moving down the quality chainto fnance Class B properties in strong locations, encouraged by healthy occupancygains and frming values. Nonetheless, fnancing lower-tier properties in secondaryand tertiary markets remains a challenge.

Portolio lenders generally originate new loans at 55 percent to 75 percent LVs,while agency lenders provide up to 80 percent leverage on high-quality assets in coremetros. All-in rates or $3 million-plus mortgages start around 3.75 percent or afve-year term, with seven-year loans pricing in the low- to mid-4-percent range, and10-year notes averaging 4.5 percent to 5.0 percent. All-in rates or smaller loans aretypically 10 to 25 basis points higher.

Submarket Overview Apartment operators in the enderloin and Central Market neighborhoods are

likely to beneft rom the recent passage o a payroll tax exemption, which is ex-pected to lure tech startup frms and workers to the area.

Facebook has begun to transition its workers rom the ormer Sun/Oracle cam-pus in Palo Alto to its new headquarters in Menlo. Te social-media giant hasindicated that it plans to expand its sta to more than 9,000 workers, which wilgenerate strong renter demand in the area.

Te 307-unit Plaza at riton Park in Foster City is the largest rental complexunder way in the metro. Te development is slated or delivery late in 2012, and

will include 17,000 square eet o retail space.

Submarket Vacancy RankingVacancy Y-O-Y Basis Effective Y-O-Y

Rank Submarket Rate Point Change Rents % Change

1 North Marin 2.0% -80 $1,404 3.6%

2 South San Mateo 2.6% -60 $1,532 7.1%

3 Central San Mateo 2.7% -80 $1,718 7.3%

4 Marina/Pacifc Heights 2.7% -30 $2,106 3.7%

5 South Marin 3.1% -20 $1,678 1.2%

6 Russian Hill/Embarcadero 3.2% -90 $2,277 4.7%

7 Haight Ashbury/Western Addition 3.8% -70 $1,847 5.9%

8 South o Market 4.1% -200 $2,208 4.6%

9 Civic Center/Downtown 4.1% -90 $1,432 5.1%

10 North San Mateo 4.4% -200 $1,783 2.4%

Te inormation contained in this report was obtained rom sources deemed to be reliable. Every eort was made to obtain accurate and complete inormation; however, no representation, warranty or guarantee, express or implied, may be made as tthe accuracy or reliability o the inormation contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise notedSources: Marcus & Millichap Research Services, Bureau o Labor Statistics, CoStar Group, Inc., Economy.com, National Association o Realtors, Real Capital Analytics, Reis, WR/Dodge Pipeline, U.S. Census Bureau.

Visit www.NationalMultiHousingGroup.com or call:

John SebreeNational DirectorNational Multi Housing Groupel: (925) 953-1700

[email protected]

Prepared and edited byMichael L. Brown

Research AnalystResearch Services

For inormation on nationalapartment trends, contact

John ChangVice President, Research Services

el: (602) 687-6700 ext. [email protected]

San Francisco Ofce:Jef Mishkin

Regional [email protected]

750 Battery Street5th Floor

San Francisco, Caliornia 94111

el: (415) 963-3000Fax: (415) 963-3010

Price: $150

Marcus & Millichap 2010www.MarcusMillichap.com

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