The News: San Francisco Still Healthy

San Francisco’s apartment story has followed the same track for a number of years: Healthy demand exceeds the supply of rental stock. “It’s like other financial hubs, such as Los Angeles and New York, that have the best-paying jobs,” said James Devincenti, senior vice president of investments for Marcus & Millichap Real Estate Investment Services Inc. “San Francisco has a great climate, a great way of life. People want to live here.”Apartment buildings built before 1979 are rent controlled, so rents are mandated to rise at a rate of 60 percent of the consumer price index. That has translated to rent increases of 2 to 3 percent in recent years, and owners of non-rent-controlled properties have been able to gain rent increases at the 6 percent level, Devincenti said.The city’s regulatory structure can make it difficult to build new apartment stock. And as the average apartment building sells for $300 per square foot per year and developing a new property costs $600 per square foot, a minimal amount of apartment inventory usually comes to the market in a given year. “Why build a new one?” Devincenti pointed out.According to Marcus & Millichap’s 2009 National Apartment Report, which ranked San Francisco as the most desirable apartment investment market, no new units were delivered in 2008 and only 400 will hit the market in 2009. But sales volume fell from $678.1 million in 2007 to $289.6 million in 2008.And one recent development bears close scrutiny. In the middle of this month, San Francisco’s largest residential landlord, Lembi Group, deeded 51 apartment buildings back to its lender, UBS. At the height of he market, Lembi acquired many properties with high leverage.What UBS will do with these properties will play a big role in apartment pricing for 2009, which Devincenti said is likely to decline around 10 percent. Whether UBS will put all the properties on the market at once or will hold onto them will bear watching, Devincenti said.