January 24, 2017
In anticipation of Connect Silicon Valley coming up February 1, we wanted to find out what one of our speakers thinks about the multifamily market. We spoke with Anton DevCo’s Andrew Baker about trends driving the market, the role the tech sector is playing, and how developers can navigate the challenges as they pursue opportunities.
Q: What are the overall trends you see shaping a transitioning Silicon Valley multifamily market in 2017?
A: The hyper rent growth of the past 7 years likely ended last summer. Supply and demand have found equilibrium, and much more modest low single digit rent growth numbers are most probable. Construction costs continue to escalate, primarily due to labor shortages, but that too will subside in the next year or two as construction starts taper off. The local economy is still robust. Interest rates (measured by the 10-year treasury) have found a new higher level around 2.50% and may continue to make their way to 3% with strong monthly economic data. That will ultimately affect cap rates, but on a 4-6 quarter lag with a 60% correlation.
Q: How will the tech industry impact the markets in the coming year? Will tech employees continue to drive demand for multifamily?
A: The technology industry remains strong and will drive the Bay Area economy, which will create new jobs and spur demand for housing. 2017 is slated to have a pickup in IPO activity, and the wealth effect will show itself with increased demand for housing of all kinds. The trend of rent vs. own will continue to favor rental product, with home ownership rates hovering around multi-decades’ lows of 63% (as compared to 69% in 2007 and the long term average of 66%). The Millennials continue to increase in size through the middle of the next decade, and they will continue to prefer urban, TOD rental product as their housing choice.
Q: Given those factors, what are some of the ways to navigate the changes and challenges to take advantage of multifamily opportunities in the Silicon Valley?
A: The easy deals are over for this cycle, but opportunities remain with disciplined risk assumptions. Covered land plays that produce income during entitlement are a good risk mitigation strategy. Integrated market rate and affordable housing deals that utilize LIHTC (Low Income Housing Tax Credits) programs make a lot of sense in this market. Lenders, investors and developers have shown restraint this cycle, and our belief is that will contribute to a continued, longer expansion with a muted softening when it does finally occur.
At Anton DevCo, we did larger, trickier entitlement deals early cycle. Mid-cycle we focused on TOD’s in cities with a Specific or Precise Plan in place. Now we are looking to do smaller deals that either can move quickly or will roll into the next cycle. We are laser focused on the sub-market, and have recently pivoted to over-weight Southern California versus Northern California, as the recovery down south has trailed.
For comments, questions or concerns, please contact Dennis Kaiser