Multifamily Market Outlook: San Jose, CA

Doug Brien
July 20, 2017

You’ve heard us say it before, but we’ll say it again: Mynd is so much more than a San Jose property management company. We’re your investment partner.

As your investment partner, we scour listings and pore over endless research briefs to stay up to speed on market trends. What are occupancy levels? Asking rents? How much new supply is coming online? These all impact a landlord’s pro forma and must be monitored closely.

Let us do the heavy lifting.

Below is a snapshot of the San Jose Multifamily Market heading into Q3 2017, courtesy of data from the CoStar Group, Real Capital Analytics, and Marcus & Millichap:

San Jose Multifamily Market Highlights

  • Local job growth (2%) outpaces the national rate (1.5%) which has put upward pressure on the local rental market. The current unemployment rate is just 3.8%. A bulk of the hiring has been at large, multinational technology firms that offer highly competitive wages so new residents are increasingly able to afford San Jose’s higher rents.
  • Multifamily apartment rents have climbed 2.9% over the first two quarters of 2017. The average effective rent in the San Jose metro area is now $2,518 per month.
  • Approximately 4,545 new apartment units are scheduled to come online this year. The impact of the new supply is most likely to be felt in Central San Jose and North San Jose/Milpitas, where roughly half of the new units will (or have) come online. Citywide, the impact of new supply should be limited to Class A buildings where investors face steeper competition given the influx of new units coming online.
  • Vacancy rates in San Jose have climbed 80 basis points this past year but remain low, at just 4.0%. Vacancy rates have climbed most rapidly in Central San Jose where vacancy rose by 330 basis points. A lack of new construction in West San Jose/Campbell has reversed the trend in these neighborhoods, with vacancy rates falling by 80 basis points to 2%.
  • Across the San Jose multifamily rental market, real estate experts expect vacancy rates to increase 70 basis points to 4.5% this year.

 

San Jose Submarket Trends (as of Q1 2017)

Submarket Vacancy Rate Y-O-Y Basis Point Change Effective Rents Y-O-Y % Change
East San Jose 1.4% -10 $1,650 2.2%
West San Jose/Campbell 2.0% -80 $2,378 2.0%
South San Jose 3.5% 10 $2,286 -1.7%
Mountain View/ Palo Alto/ Los Altos 3.9% 50 $3,086 4.3%
North San Jose/ Milpitas 4.1% -10 $2,652 -0.9%
North Sunnyvale 4.4% 180 $2,686 0.8%
Santa Clara 4.7% 120 $2,640 0.7%
South Sunnyvale/ Cupertino 5.1% 80 $2,898 -0.2%
Central San Jose 6.4% 330 $2,358 0.3%
Overall Metro 4.0% 80 $2,518 0.6%

Sources: CoStar Group; Real Capital Analytics

 

San Jose Multifamily Investment Trends

Given the influx of Class A construction, more investors are looking to purchase Class B and C assets outside of the downtown San Jose core. Investors are lured to Class C properties, in particular, given their relatively strong rents and low vacancy rates. Many investors are purchasing properties that offer a value-add opportunity; others are purchasing industrial buildings and converting them to apartment rentals.

Investors are increasingly opting to buy and hold their San Jose assets which has limited supply and led to significant price appreciation. As evidence:

  • Transaction volume has decreased 10% over the past year; and
  • The average price per unit rose 8% to almost $320,000 per door.

The most highly-sought after properties remain in San Jose’s urban, transit-oriented neighborhoods.

Private investors accounted for the bulk (56%) of San Jose’s multifamily transactions, followed by equity funds and other institutional investors (29%), foreign investors (9%) and REITs (5%).

Demand for San Jose multifamily apartments is expected to remain strong for the latter half of 2017. The market is considered to be crowded and highly competitive; it is not uncommon to see multiple bidders vying for the same property.

As your investment partner, we will continue to monitor these market trends throughout the year.

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