The Times They Are A Changin’

October 20, 2016

Silicon Valley and Peninsula multifamily properties have been some of the nation’s most popular property types for years, and demand across Class A, B and C communities is still very strong – as has been rent growth and value appreciation. Add in a low-interest-rate environment and we are seeing cap rates at sub-4 percent, even for Class C properties.

But make no mistake, we are past the peak.

After more than four years of double digit rent growth, Silicon Valley and the Peninsula’s multifamily sector are showing signs of softening. Units are taking longer to rent, more vacancies are coming to market and our rent growth streak has stabilized and actually started to reverse in some areas. The election and global events also create unknowns when it comes to domestic policies, as do worldwide economic stability and foreign investment activity – of which the Bay Area has always been a favorite.

With an interest rate hike by the Feds imminent, experts agree that it will be hard to avoid some degree of value erosion.

This is not to say that we’re in a bad market. But it is changing.

San Jose alone has ranked as a top ten U.S. multifamily market for years. Jobs and a high cost of housing have fostered an almost insatiable demand among Millennials and Baby Boomers. So has a “renter by choice” demographic that has local home ownership at its lowest level in more than half a decade. Factors like these have helped our local asking rents recover, and then push as much as 40 percent above their pre-recession peak.

Following a record-breaking 2015 for everything from rent growth and construction to sales volume, industry insiders still support a strong market prognosis through 2016, ending the year at an average sub-5 percent vacancy rate nationwide. After that, the outlook gets muddled…

Broadly speaking, our economy is robust. But there are quiet warning signs that – although unlikely to lead to a near-term recession – do indicate a leveling. For example, the large Bay Area tech companies that we’ve come to depend on aren’t hiring at the same pace, and in some cases are talking reductions.

The crazy thing is… Even in this softening market, cities are talking rent control!

At a time when rents are actually going to start falling, almost a dozen cities in the Bay Area are talking rent control. I was shocked when the San Jose City Council sidestepped widespread recommendations earlier this year to pass a more stringent Apartment Rent Ordinance. And before we’ve been able to fully grasp even the fallout of this vote (and yes, there is fallout) the movement has spread.

Alameda, Burlingame, Campbell, Healdsburg, Lafayette, Mountain View, Pacifica, Richmond, San Mateo, Santa Rosa – each of these communities is at some stage of considering rent control. As a citizen, broker and owner, I have been a vocal opponent of this effort, and irate at the idea of the government trying to dictate fair market value.

While I applaud cities for wanting to provide solutions to our high cost of living, I abhor this illogical, knee-jerk policy that has proven only to lower property values, discourage investor interest, irrevocably weaken the quality of our multifamily inventory and actually decrease the number of affordable housing units available to those who truly need them. In the process, it places the burden of affordable housing solely on the shoulders of the building owner community.

Before it’s too late, I encourage you to take a deeper dive into this topic via my website:, where you can access our recent rent control white paper and conversations I’ve had with publications such as The Registry, and the San Jose Mercury news. You can also stay up-to-date on local rent control initiatives via the California Apartment Association’s website: Then share your concerns with your city council, your friends and colleagues, and make your voice heard with a “NO” vote against the perfect storm that is rent control.

None of this is doom and gloom. But smart investors need to stay sharp.

In the natural real estate cycle, those empowered with knowledge are in the best position to balance risk with opportunity. In the face of rent control, owners need to be even more vigilant, keeping abreast of local initiatives and putting market-specific strategies to work, such as keeping rents at market rate. This has not been an easy thing to do during our years of rapid rent growth, but this one act could have a tremendous impact on your asset’s value.

If you feel out-of-touch with market trends or if you have questions about a particular facet of the multifamily sector, call me today and I’ll bring you up to speed. And in a reference back to my last article… if you are considering selling in the next six to 12 months, don’t wait. Now is the time, while value and demand still sit at a near-historic peak, and interest rates remain favorable to potential buyers.

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