MikeBolen.com

The San Francisco bay area and Napa County has some of the nation’s most extreme barriers to new building in terms of land availability and especially development costs. There’s just not enough land available in the Bay area for single-family building to reach especially large volumes, and furthermore, much of the population can’t afford the region’s high single-family home prices.

The region isn’t experiencing the run-up in single-family home construction seen in most other parts of the country. In fact, while building authorizations in the single-family sector dropped 11 percent in the 12 months ending March 2005, multifamily starts jumped 20 percent, with apartments and condominiums now accounting for nearly half of ongoing total housing development.

Meanwhile, San Francisco Bay area apartment occupancy has been inching upward for more than two years. The spring 2005 occupancy rate reached 96.3 percent, up 2.4 points from the bottom performance of just less than 94 percent in 2003. While occupancy reached 98 percent during the late 1990s-early 2001 frenzy, today’s 96.3 percent occupancy rate actually is within a percentage point of full occupancy by long-term historical standards. Napa Valley Occupancy is even stronger with only a 2.2% vacancy rate.

Rents, on the other hand, still have a way to go. The typical apartment community in the Bay area suffered a 35 percent cut in effective rents between 2001 and the end of 2004, before rates began eking up in 2005. Still, the year-over-year increase as of spring 2005 was less than 1 percent. Average rents now stand at $1,341 per month, or $1.624 per square foot.

With Bay area apartment occupancy tightening, the region should be positioned to experience strong rent growth once again, assuming that single-family home values remain astronomical. During the same time as apartment rents faltered by 35 percent, the median price of a single-family home shot up 42 percent and now stands at $656,700, according to the National Association of Realtors. This makes the premium to buy versus rent housing in San Francisco one of the steepest in the country.

The outlook for rent achievement appears promising, too. Though it’s unreasonable to expect rates to return to their early-2001 high anytime soon, the return of rent growth well above the national norm certainly should be within grasp. Even if single-family home prices dipped, there’s still ample room for rents to increase. The Bay area, then, should join places like the Florida markets, Southern California, Austin, Seattle, and Las Vegas among the country’s rental revenue growth leaders in the immediate future.