Vacancies are back to pre-pandemic levels in San Francisco, but rents have yet to fully bounce back. That could leave San Francisco on weaker footing if the economy enters a recession. Victor Calanog, Head of Commercial Real Estate Economics at Moody’s Analytics, shares his analysis.
San Francisco remains a relative laggard for apartment sector recovery metrics. Effective rent levels broke the $3,000 mark in the third quarter — a 2.5% increase over the period. But they remain 4.3% below rent levels at the end of 2019, while rents in most other markets have recovered and now exceed pre-pandemic levels, according to Moody’s Analytics CRE. Vacancies are at least back to pre-pandemic lows of 4.3%, suggesting that demand for apartments is returning — even if pricing power for landlords remains constrained.
On a year-over-year basis, San Francisco’s effective rent rose by 5.9%. That’s not bad, but it’s only around one-half or one-quarter of comparable rent increases in Los Angeles and New York, respectively. Any national investor with mobile capital would therefore be hard pressed to think of San Francisco as a relatively attractive market, given the other choices out there.
Top multifamily submarket: West San Francisco
There are some submarkets that have been recovering faster. West San Francisco posted the strongest year-over-year effective rent growth, at 9%. The submarket’s vacancy rate of 1.2% is the lowest in San Francisco and is actually the tightest rate this submarket has recorded in more than 20 years.
Recession could have bigger effect on San Francisco
A note of caution: Economic forecasts have become gloomier over the course of 2022. With ongoing uncertainty from rising interest rates, elevated inflation and geopolitical conflict, the apartment sector is unlikely to remain unscathed if the economy enters a recession. And if an economic downturn does occur, San Francisco will enter the pullback in a weaker position, given how slow its recovery has been. Rents are projected to grow by only 2% to 3% in 2023.
By the editorial team at Story by J.P. Morgan
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