As the regional economy recovered from the restrictions put in place during the early days of the COVID-19 pandemic and employees began returning to the office, the Bay Area multifamily rental market turned a corner in 2021 attracting new residents from outside the region along with some who returned. The pricing of for-sale housing continued to shatter records and burgeoning renter demand drove the Bay Area occupancy rate to 94.8% in January, approaching the previous cyclical peak.
Suburban submarkets continued to outperform urban infill submarkets in the second half of 2021 and into 2022. With more tech firms announcing return to office dates this spring, renter demand should drive the occupancy rate higher in the coming months. The occupancy rate in the East Bay surpassed the 2020 level even with a large amount of new units delivered in the last year. In Silicon Valley, the occupancy rate plateaued just shy of the 2020 peak. Highlighting the shift away from urban neighborhoods during the pandemic, the occupancy rate in San Francisco reached 93%, several percentage points lower than early 2020.
While rent growth in the Bay Area has lagged the double-digit pace of most large cities across the country, the accelerated pace of the last few months drove the average monthly rent to approach pre-pandemic levels. By January 2022, the average asking rent was only 2% lower than the pre-pandemic peak, though many in-place leases remain below market. The average rent increased the most in highly amenitized and transit-adjacent apartments in recent months, as demand swelled from younger, highly educated workers in STEM fields. On the other hand, workforce housing rents remain roughly 10% lower than pre-pandemic levels. Despite the strong wage gains of many entry-level hourly positions, continued weakness in the leisure and hospitality sector has left many workers that remained in the Bay Area with lower incomes than prior to the start of the pandemic.
With many households moving to more affordable parts of the East Bay during the pandemic as well as in the years leading up to 2020 to reduce housing costs, rental demand helped boost the average monthly rent by more than 4% compared with the previous peak. In Silicon Valley, the average rent remains roughly 4% lower than pre-pandemic. San Francisco remains the laggard, with the average rent of most buildings between 10% and 15% lower than 2019 and 2020 levels.
With tenants seeking larger units for remote work and learning spaces, elevated demand for three-bedroom units drove the average asking rent greater than pre-pandemic levels while two-bedroom rents were roughly on par with early 2020. The same demand drivers have the opposite impact on smaller units, and the average rent for studio units has lagged during the recovery. Through early 2022, rents were 10% lower than the prior peak. In San Francisco, studio rents remain 15% to 20% lower than 2020. While a return of office workers to SoMa and the Financial District will help, weaker rents for smaller units may persist the remainder of the year.
As occupancy continued to recover, rental concessions fell throughout much of the region. However, in some neighborhoods, as well as for studio and smaller units, concession usage persists, averaging 5% to 10% of expected rent over the lease term. Concession availability in new product typically outpaced existing apartments as owners aggressively competed for tenants in order to reach stabilized occupancy.
With demand strengthening and rising costs placing ownership out of reach for many households, multifamily development should continue to accelerate. In 2021, nearly 17,000 units were delivered throughout the Bay Area, the greatest amount of construction in more than a decade. The current development pipeline is on pace to shatter last year’s record, with more than 22,000 units in some stage of construction.
The Bay Area apartment market is poised to accelerate into the remainder of the year. Burgeoning renter demand will be supplemented by strong employment growth by tech firms, attracting young households from outside of the region. With more tech firms reopening offices, the return of workers will be a positive for the apartment market, particularly San Francisco, and rent growth should accelerate. In most neighborhoods, landlords should have leverage to increase rents on renewals while maintaining elevated renewal rates. Skyrocketing for-sale housing costs will continue to funnel a large share of households to rental product. The construction boom will continue for at least the next two years, with the bulk of construction centered on the East Bay and Silicon Valley. The large volume of pent-up demand should absorb much of the new product coming online in the near term though concession utilization within new buildings may persist. Rosen Consulting Group predicts that economic headwinds will persist this year, including high inflation and the war in Ukraine, yet the overall trajectory of the economy and regional apartment market remains positive.
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