Average occupancy and effective rent at the national level have faced downward pressure this year thanks in large part to new supply continuing to outpace apartment demand. However, this dynamic has not been ubiquitous across all markets. One example of an area that has managed to buck these national trends is the San Francisco – Oakland market.

All numbers will refer to conventional properties of at least 50 units.

New Supply and Net Absorption

After a surge in new supply in 2021 and 2022, deliveries have come back down so far in 2023. About 5,700 new units introduced across the market through September was the lowest total of the last five years – and by a margin of more than 1,000 units. When considering new supply as a share of existing conventional stock, the 1.7% figure for the San Francisco – Oakland area this year has been well below the national 2.6% total. The slowdown in new supply at a time when a majority of markets around the country are in the midst of an uptick in deliveries has been a boon to performance this year.

Nearly 40% of submarkets have seen no new units delivered through September. Among those that have, a handful stand out. The Mountain View area has led the way with almost 900 new units brought to market through the first three quarters. Downtown Oakland has seen more than 600 new units delivered and just more than 400 new units were brought online in the Alameda region. On the basis of new supply as a share of existing stock, the Berkeley – Albany and Bayview – India Basin areas have been notable.

The other side of the supply – demand relationship has also been encouraging for the market. Almost 9,000 net absorbed units through September was the most for this portion of the calendar since 2021 and well ahead of any other recent year. The Bay Area, like many of the Gateway markets, particularly struggled in 2020 and was later to the recovery than some of the Sunbelt and Mountain West markets. This year, the area closed September as the number one market in the country in net absorption.

Not all has been roses on the demand front. The robust result so far this year has been concentrated in the Class B and Class C subsets. Both have dramatically outperformed any recent year aside from 2021. For Class A and Class D, this year has represented a step back from 2022. For Class D, demand so far this year has been the lowest of the last five years.

Average Effective Rent and Lease Concessions

Despite net absorption outpacing new supply and the resulting 1% boost to average occupancy, rent growth has been muted. While not ideal at a time when costs are elevated for operators, a pause in the robust growth of the last two years for the second-most expensive market in the country may help return some balance to the market. Average effective rent growth for new leases of 0.8% through September was a far cry from last year’s 8% jump in the same period and was lower than in any recent year with the exception of the 5% decline through the first three quarters of 2020.

Interestingly, all four price classes closed September in positive territory for the year. In many markets around the country, at least one price class was already in negative territory. Class A rent growth has led the way at approximately 1%, with the remaining three price classes have seen increase right around 0.5%.

Lease concession availability has been on the rise this year, and this has partially taken the wind out of the rent growth sails. Around one-quarter of conventional properties were offering a discount for new leases at the end of the third quarter. This represented a double-digit increase from the start of the year. Discount availability is now higher than at any point since 2021 when concessions were on the downward slope from their early pandemic period peak.

Takeaways

Overall, 2023 has been a good year for multifamily in the San Francisco – Oakland market. While rent growth has lagged the national rate, the area has been able to take advantage with a notable boost to apartment demand. In a year in which demand has remained tepid after bottoming out in 2022, leading the nation in net absorbed units is nothing to sneeze at.

A slowdown in deliveries has also helped the market. After struggling last year with high new supply and low demand, this year has seen a reversal there and the result has been a real improvement in average occupancy. The 1% gain in average occupancy through September was the largest increase of any primary market.

The fourth quarter is likely to bring with it a slowdown in apartment demand and rent growth, but the San Francisco – Oakland market is nonetheless positioned to finish as one of the more robust performers of 2023.

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