The second quarter of 2024 has brought significant activity and pivotal shifts in San Francisco's market for buildings with 5 or more residential units, highlighting an emerging robustness in investment opportunities and market dynamics. This report offers valuable information that helps stakeholders understand and manage the market’s complexities.

Market Performance Analysis

• Sales Trends: The period saw a dramatic increase in the number of transactions, with sales more than doubling from the first quarter and showing a marked improvement over the same period last year. Properties were typically on the market for 42 days before receiving offers, indicating a fast-moving market.
• Absorption Rate: This quarter's absorption rate, a key metric indicating the percentage of available properties that went into contract, reached its highest level since 2018, demonstrating strong buyer demand amidst tightening supply.

Economic and Market Indicators

• Capitalization Rates: Cap rates have been rising steadily since mid-2022, reaching levels not seen since the recovery period following the 2008 financial crisis. This uptrend suggests that the market is currently offering higher returns on investments, drawing increased interest from investors.
• Employment and Demographics: Employment levels are still recovering, remaining approximately 7.5% below pre-pandemic figures. The most affected demographic is the 25 to 44 age group, primarily due to the widespread adoption of remote work. Despite these challenges, there is a positive trend in hiring within the AI technology sectors, which could influence future market growth.

Rental Market Dynamics

Rental Price Fluctuations: After a significant drop in 2020, rents have been recovering but continue to see fluctuations. In 2024, rents showed a slight increase yet remained lower than the previous year, significantly underperforming compared to early 2020 levels.

Long-term Rental Trends: Utilizing data from sources like Apartment List, Zillow, and Socketsite.com, it is clear that while there is no centralized tracking of lease rates, the compiled data reveals a market still adjusting to post-pandemic economic conditions. After a sharp decline in 2020, rents rebounded in 2021 and have shown variable adjustments through 2022 and 2023. As of 2024 year-to-date, rental prices have increased, yet they remain slightly lower when compared year-over-year. Despite this recent uptick, current rent levels still sit well below those of early 2020, prior to the pandemic's impact. Additionally, the San Francisco population has decreased by just over 7% since the pandemic began, which has likely influenced demand dynamics within the rental market. This demographic shift, coupled with the economic impacts of the pandemic, continues to shape the landscape of residential rents in the city. The diversity in data sources and the presence of incentives like free rent contribute to the complexity of accurately assessing rental trends.

Property Sales

Active Listings and Contracts: As of early July, there were 74 listings for 5+ unit apartment buildings on the market without accepted offers. These properties had a median size of 6130 square feet and a median list price of $2,825,000, and they remained on the market for an average of 95 days. Among these, 58 listings were for buildings containing 5 to 16 units. Additionally, 29 properties were in contract with a median size of 9000 square feet, a median list price of $3,495,000, and a median of 41 days on the market before receiving an offer.

Challenges in the Office Sector

Vacancy and Lease Rates: The office-building sector continues to struggle, with a persistently high vacancy rate of over 32% and declining lease rates. The reduced office attendance, more than 50% below pre-pandemic levels, continues to be a critical factor negatively impacting demand for apartments and influencing rent rates.

Conclusion

The strong performance of San Francisco's multi-family building sector in Q2 2024 suggests that the market may be stabilizing and could continue to grow. This is happening despite some ongoing economic challenges and changes in the city’s workforce and housing demands.

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