Nearly 7.8 million people now call the San Francisco Bay Area home, with the fastest growth rates in Alameda, San Francisco, and Contra Costa counties (U.S. Census Bureau April 2019). The population of the nine-county region grew by over 600,000 people since 2010 — a nearly 8.5% increase — outpacing the growth rate in any other part of California. How did all this growth come about?
“You don’t need an expert to tell you that it’s obviously related to the strong economy of the Bay Area,” says Hans Johnson, a demographer with the Public Policy Institute of California, noting that the region is now struggling to accommodate its rapid pace of job growth and very low unemployment.
Of course, with this extreme growth comes plenty of opportunities for sound real estate investments. The following excerpt from the July 2018 report by the Bay Area Council Institute/ McKinsey & Company mentions factors that have made this area so ripe for investment:
The nine-county San Francisco-Silicon Valley Bay Area has been the international innovation hub since the 1970s, one of the nation’s most resilient regions for the past fifty years, and the fertile ground on which Apple, Facebook, Google, and other corporations have grown into top companies by global capitalization in just the last decade.
Even though these economic success trajectories have been almost unprecedented, the Bay Area economy is still currently on the upswing, rather than having reached a peak or started a decline. Much of the growth has occurred in clusters of highly-productive industries. These have thrived due to factors such as the Bay Area’s unparalleled workforce, world-class higher education system, premier startup ecosystem, and the almost limitless opportunities created by the region’s dense concentration of venture capital that funds innovation across a broad range of established and emerging industries.
Here are our professional findings for why you should consider investing in Bay Area real estate.
A Resilient Market
The steadfastness of our local market projects a significant influence on real estate values.
“Financial-market cycles have been around for hundreds of years, from the Dutch tulip mania of the 1600’s through today’s speculative frenzy in digital-currencies,” says Patrick Carlisle, Compass chief market analyst in the Bay Area. “While future cycles will vary in their details, the causes, effects, and trend lines are often quite similar. Looking at cycles gives us more context to how the market works over time and where it may be going much more than dwelling in the immediacy of the present.”
A look at Bay Area housing price cycles over the past 30+ years shows a market that recovers relatively quickly from economic downturns and disruptions to the financial system, offering investors positive returns in the long term.
Property price appreciation generally tracks inflation by +/- 2%. Based on the inflation rate of 2% for the past 12 months, a real estate investment should have seen (at minimum) a 0-4% appreciation.
A look at price gains in Bay Area properties over the last two decades, however, shows a market that consistently outpaces this norm.
Price appreciation, however, is a secondary attribute.
Your main focus should be on the net return on your real estate investment generated by rental income.
High Rental Prices
The Bay Area rental market is unlike any other in the country. Unprecedented growth of tech companies has fueled the market over the past few years, placing upward pressure on rents and downward pressure on vacancies.
Rents in the Bay Area are among the priciest in the nation. After two years of low-to-negative growth, Bay Area rents picked up steam in 2018, especially in the second half of the year, according to a quarterly survey of large apartment complexes by RealPage. At the start of 2019, the average asking rent for all sizes of apartments in the San Francisco, San Jose, and Oakland metro areas stood at $3,335, $2,789 ,and $2,302 respectively.
RealPage predicts that rises in rents will slow a bit this year—to 3.7% in the San Francisco metro area, 3.9% in San Jose, and 2.2% in Oakland—thanks to a big jump in new construction.
While the correction is welcome, the Bay Area’s economy—with an annual growth rate of 4.3% over the past three years, strong population growth, rising incomes, low unemployment, and a new wave of tech-company IPOs slated for 2019 and 2020—offers a solid underpinning for the rental market in the foreseeable future.