Multi-Family Construction Slows

Apartment construction has been keeping a brisk pace in the last few years across the Bay Area. However, rising costs may be at the root of a recent slow down, as developers grapple with increasing materials, land and labor costs.

The high-point came in early 2019, when there were more than 28,000 units under construction in the metro areas of San Francisco, Oakland, and San Jose, according to CoStar.

Image Credit: CoStar

Construction starts, however, tell a different story. According to a report by CoStar, the peak for construction starts occurred early in 2018, with 5,000 units started in the 1st quarter. By mid-2019, that number was down to 1,000 units started for in the 2nd and 3rd quarters.

Increasing costs have hit developers in the pocketbook, not only with rising costs for land, but also increasing labor and material costs, and entitlement fees. According to Turner and Townsend’s 2018 Construction Costs Survey, the Bay Area holds the dubious title of most of the 2nd most expensive market in the world for construction (New York is #1, Hong Kong is #3). Of course, those of us who live here don’t find that surprising.

The pace of under-construction units, while substantially higher than previous years, is not enough to satiate demand. There is little risk of oversupply, according to CoStar’s forecasts, with strong fundamentals across San Jose, San Francisco and Oakland for the next five years, despite the increase in supply and pressures from a slowing jobs market. This means that as long as the builders keep building, there is plenty of pent-up demand for housing to ensure adequate occupancy.

Should the slowdown in construction starts continue long-term, then the pressure on rents will continue unabated, as demand continues to outstrip supply. The increase in inventory promised to help alleviate the upward trajectory of housing costs, so any curbing of the development of new housing will cause a continued rise in rents

Keystone Commercial Brokerage serves the needs of commercial real estate investors in the Santa Clara and San Mateo counties, specializing in commercial property, multi-unit residential, office space, and multi-use property. Paul Phangureh has over 16 years of experience in buying and selling in the Santa Clara and San Mateo County areas. Contact Paul at 650-924-2544, or email at paul@keystonebrokerage.com

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