Q2 2012 San Jose, California Apartment Market Trends

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Q2 2012 San Jose, California Apartment Market Trends

Building boom. Soaring rents, an effect of expansion in the high-paying, high-technology business sector, low vacancy, strong demand and the protections provided to rents by high single-family home prices have ignited what the San Jose Mercury News described in August as a record-breaking building boom. “The demand for apartments close to work should continue ‘as long as the job market continues to expand and people are moving into that area because of all the great things that are happening there,'” an executive with Equity Residential informed this source. Indeed, Reis’ late-September report on individual construction projects cites 5,258 market-rate units underway countywide in 13 projects, the largest of which, with 1,750 units, is the Crescent Village development in San Jose. The firm expects completion in December 2013.

The latest starts include a September groundbreaking for the 271-unit first phase of the Riverview complex in the Northeast San Jose submarket, due on line in April 2014. All told, 1,425 additional market-rate apartments in five phases of equal size are planned for the project. Other major projects underway include Equity Residential’s 444-unit Domain (formerly Vista Montana) project scheduled to deliver in the same submarket in May 2013. In September, Shea Properties acquired a 2.7-acre parcel in Milpitas near a planned BART station toward the development of a 204-unit project “that could sprout thousands of additional multifamily housing units in the next few years.” Also planned are 954 market-rate units in four phases of the McCandless Drive District in Milpitas. Yet another Milipitas project, the largest expected to deliver metro wide in 2012, is the 374-unit Cerano Apartments, which completed in September.

Soaring rents, falling vacancy. With only 138 units delivering all told through the first half of the year, net absorption ran at 533 units. More impressive still is the tightness of the market, which itself may exert a retardant effect on absorption. Reis put the vacancy rate for second quarter at only 2.5%, down 10 basis points for the period, down 70 year-over-year and the lowest rate on the firm’s books for this market since 2000. While negligible absorption in July left the vacancy number unchanged, additional tightening is expected over the remainder of the year. Only in 2013, when the new supply begins to arrive on line in larger numbers, will the market loosen—but only by a little. (Of the projects currently under development per the firm’s late-September construction report, 4,323 units are scheduled for delivery next year.)

“Bay Area rents have gone through the roof,” the Silicon Valley/San Jose Business Journal reported in August. According to Reis, mean asking and effective rates for the second quarter were $1,631 and $1,570 per month, respectively, up 1.3% and 1.5% for the period, up 1.8% and 2.4% year-to-date following gains of 4.6% and 5.0% in 2011. July added respective increases of 0.5% and 0.6%. Reis put the Class A asking average at $1,865, up 2.0% since year-end. Interestingly, the Journal report cites a correlation between rising rents and Silicon Valley companies launching new IPO’s. Clearly, then, the expansion of the tech sector would be playing a central role in the unfolding drama. “Diminished concessions incited a sharp gain in average revenue,” reports Marcus & Millichap in its third quarter 2012 report on the local market. Reis reports a 4.5% increase in revenue per unit over the past four quarters.

This is not the first instance of a steep up-cycle in the fortunes of the local market on the wings of an up-cycle in the high-tech sector. Trends in that business segment may contribute to the next downturn as well, if it comes. Vacancy, meanwhile, is expected to end 2012 at 2.4%. Rent growth rates for the year currently are projected at 4.2% and 5.4% for the respective asking and effective averages. Moderate increases in vacancy should commence in 2013 as new supply hits the market in larger numbers. Low overall vacancy and strong rent growth are expected for the foreseeable future nonetheless.