SanJose_4Q11Apt

8/3/2019 SanJose_4Q11Apt

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

ApartmentResearch

San Jose Metro Area Fourth Quarter 2011

South Bay Landlords Raising Rents at Rapid Clip

As South Bay property operations lean in avor o landlords, marketwide rents will appreciate markedly over the remaindero this year and into 2012. Leasing activity continues to swell in step with rising employment, but more specically rom the in-migration o newly employed tech workers, which has steadily bolstered net absorption over the past two years. Tis surge in renterdemand growth has been accompanied by ew stock additions, compressing the metros vacancy rate to a decade low this year. Asa result o this tight supply/demand balance, owners are chipping away at concessions and raising rents at a pace nearing thoselogged ahead o the downturn. In Mountain View and Cupertino, or instance, Class A rents have spiked more than 5 percent yearto date, a trend that will likely go uninterrupted into early 2012 as renter demand tied to technology persists. Absorption at thelower end o the spectrum is also on the rise, though Class B/C rent ination has yet to match robust hikes recorded by the toptier. Extremely tight operating conditions have led some builders to push projects through the pipeline, but with home prices to

remain out o reach or many households, new units delivered beyond 2011 will ace short lease-up times.

Bullish investor demand or properties will compel private-equity buyers to move down the quality scale, driving up salesactivity in the process as more mid- and lower-tier assets clear the market. Tis shit began to take shape over the past year, cata-lyzed by low interest rates and the onset o a new rent growth cycle. Te number o assets changing hands comprised o ewerthan 10 units, or instance, accelerated 70 percent over the last year. Nonetheless, location remains a key determinant, and recentclosings remain tightly centered around major employment centers. In general, smaller but well-located mid-tier properties aretrading at cap rates averaging in the low-6-percent range, while mid- to low-end assets in blue-collar areas sell at yields between6.0 percent and 7.0 percent. At the upper end o the spectrum, best-in-class properties command cap rates in the high-4-percentto low-5-percent range.

2011 Annual Apartment Forecast

Employment: San Jose metro employers will increase staf counts by 26,000 positions in 2011, a 3percent expansion, which will outpace the addition o 11,600 jobs last year.

Construction: During 2011, developers are scheduled to complete 480 market-rate apartmentunits, outpacing the completion o 270 units in 2010. Despite the ramp up in deliveries, total stockadditions this year will remain more than 25 percent below the ve-year annual average.

Vacancy: South Bay apartment operations will steadily strengthen through 2011 due to outsizedhome prices and renewed job creation. As such, vacancy will all 80 basis points this year to 3 per-cent, ollowing a 130-basis-point drop logged in 2010.

Rents: Asking rents will climb 5.4 percent to $1,525 per month in 2011, while efective rents grow6.3 percent to $1,434 per month. Last year, asking rents gained 3.3 percent, and efective rentspushed up 3.4 percent.

3.0%increase in

totalemployment

480units

will becompleted

80 basispoint

decrease invacancy

5.4%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*-40%

-20%

0%

20%

40%

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 Employers in the South Bay marketplace expanded payrolls by 26,800 positions

during the 12 months ending in the third quarter, a 3.1 percent increase, markingCaliornias largest absolute gain. During the preceding year, local employment levelsgrew by 9,700 jobs.

Job creation in the metros key manuacturing sector accelerated 4.2 percent yearover year, or by 6,400 positions, bringing the segments total employment levels to

within 5.3 percent o pre-recession highs. During the rst nine months o 2010, themanuacturing sector logged a gain o 4,500 spots.

Only three employment sectors have posted year-to-date losses, including leisure andhospitality, nancial services and other services, resulting in an aggregate decrease o3,100 workers.

Outlook: San Jose employers will increase staf counts by 26,000 positions in 2011a 3 percent expansion, which will outpace the addition o 11,600 jobs last year.

Housing and Demographics During the year ending in the third quarter, single-amily developers secured permit

or 900 units, which is nearly identical to the number o permits pulled one yearearlier. Multiamily permit issuance, meanwhile, increased twoold in that time toapproximately 2,850 units.

During the third quarter, the median price or a single-amily home in South Baywas $584,900, 3.1 percent lower than 12 months earlier. Te median household income ticked up 2 percent year over year on renewed job growth to $89,300 annually

In the third quarter, average Class A asking rents were $1,339 per month less thanthe average monthly mortgage payment, using traditional lending terms.

Outlook: Although alling home values will enable some residents to leap into own-ership, home prices remain out o reach or a sizable share o local residents, a realitythat will continue to provide a layer o renter demand.

Construction Over the past 12 months, apartment builders completed one market-rate complex

accounting or 108 units, down rom the addition o 513 units one year earlier.

Tere are 1,216 rental units under construction across South Bay, which represents1.1 percent o existing stock. Te largest project slated or delivery this year is the374-unit Faireld Cerano apartments in Milpitas; nal build out on the develop-ment is scheduled or the ourth quarter.

Te markets planning pipeline in the third quarter consisted o 6,675 units. Duringthat time, however, less than 10 percent o the units under consideration containedestablished start dates.

Outlook: During 2011, developers are scheduled to complete 480 market-rateapartment units, outpacing the completion o 270 units in 2010. Despite the rampup in deliveries, total stock additions this year will remain more than 25 percentbelow the ve-year annual average.

page 2 Marcus & MillichapuApartment Research Repor


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*

*

VacancyR

ate

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

$60

$95

$130

$165

$200

08 09 10 11*07* Trailing 12-Month PeriodSources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

* -

Vacancy Limited stock additions, coupled with re-employed residents entering the rental

market, pushed the metros vacancy down 80 basis points year over year to 3.1 per-cent in the third quarter. During the corresponding period 12 months prior, vacancyell 110 basis points.

op-tier renter demand continues to strengthen at a rapid clip. During the past year,vacancy in the Class A sector decreased 60 basis points to 3.3 percent, which is 160basis points less than the segments ve-year annual average. Over the preceding 12months, vacancy ell 150 basis points.

Class B/C vacancy averaged 2.9 percent in the third quarter, down 100 basis pointsrom the prior period, led by broad-based payroll expansion and minimal supply-side threats.

Outlook: South Bay apartment operations will strengthen through 2011 due tooutsized home prices and renewed job creation. As such, vacancy will all 80 basispoints this year to 3 percent, ollowing a 130-basis-point drop logged in 2010.

Rents Asking rents reached $1,506 per month in the third quarter, a year-over-year increase

o 5.1 percent, while efective rents rose 5.5 percent to $1,409 per month. In the pre-ceding year, asking rents ticked up 1.2 percent as efective rents slipped 0.1 percent.

op-tier asking rents grew 5.6 percent over the last year to $1,722 per month, whilethe Class B/C market resulted in a 4.5 percent hike to $1,266 per month.

Leasing incentives averaged 22 days o ree rent in the third quarter, down rom 25days o ree rent one year earlier. As operating conditions tightened, revenues rose 6.4percent over the past year, outpacing the 1.1 percent gain recorded during the prior12-month period.

Outlook: Asking rents will climb 5.4 percent to $1,525 per month in 2011, whileefective rents grow 6.3 percent to $1,434 per month. Last year, asking rents gained3.3 percent, and efective rents pushed up 3.4 percent.

Sales Trends** Apartment transaction velocity in the South Bay marketplace accelerated nearly 60

percent over the most recent 12 months, ollowing a 2 percent ease one year earlier.During that time, trading activity was led by a resurgence o closings or propertiespriced below $5 million.

Te median price or properties sold in the past year ell 9 percent to $150,300 perunit, driven by the mix o properties trading, as more investors descended the qual-ity scale. At the upper end o the spectrum, assets traded above $10 million changedhands with a median price o $212,400 per unit.

Cap rates or Class A assets in sought-ater areas will average in the high-4-percentto low-5-percent range. Well-located mid-tier assets will generate ofers in the high-5-percent to low-6-percent range, while lower-tier deals in blue-collar areas solicitofers between 6.0 percent and 7.0 percent.

Outlook: As demand or assets in better locations outstrips the availability o supply,some buyers will gradually consider areas currently overlooked, an occurrence that

will likely take hold to some extent in 2012.

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 rst 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 rst hal.

Lenders view apartments as preerred assets and are moving down the quality chainto nance Class B properties in strong locations, encouraged by healthy occupancygains and rming values. Nonetheless, nancing 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 ave-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 Googles recent lease execution o 700,000 square eet in Sunnyvale adds to the

collection o tech rms that have secured space in the area, which includes Mo-torola, HP and Microsot. Expansions among these tech companies bodes welor local operators, as residents seek housing near work.

In Mountain View, Symantec has signed a large lease, which can accommodateup to 1,000 workers. Te company expects to move employees into the buildingover the next two years, which will likely aid apartment absorption trends nearthe campus in the process.

At 289 units, the Mountain View/Los Altos submarket accounts or the mosplanned projects with established start, which are slated to break ground in thenext nine months. In all, more than 3,900 units are under consideration in theNortheast San Jose submarket, or 20 percent o the areas existing stock.

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

Rank Submarket Rate Point Change Rents % Change

1 Campbell/Los Gatos 1.9% -100 $1,252 4.0%

2 Sunnyvale 2.4% -50 $1,427 6.0%

3 East San Jose 3.0% -140 $1,275 4.8%

4 Cupertino/Saratoga 3.0% -90 $1,687 4.6%

5 Northeast San Jose 3.1% -90 $1,496 5.7%

6 South San Jose 3.1% -100 $1,126 4.0%

7 Mountain View/Los Altos 3.4% -60 $1,627 8.4%

8 Santa Clara 3.7% -120 $1,427 4.5%

9 West San Jose 3.8% -20 $1,244 5.0%

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]

Palo Alto Ofce:Steven Seligman

Regional [email protected]

2626 Hanover StreetPalo Alto, Caliornia 94304

el: (650) 391-1700Fax: (650) 391-1710

Price: $150

Marcus & Millichap 2010www.MarcusMillichap.com

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