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CoStar Market Insights: Most Active Multifamily Submarkets in San Francisco

Top Three Submarkets Seeing Most New Apartment Construction
August 7, 2017
Jesse Gundersheim is a Market Economist with CoStar Market Analytics covering the San Francisco region.
Jesse Gundersheim is a Market Economist with CoStar Market Analytics covering the San Francisco region.

More High-end Apts. Added in San Francisco’s Southeast Neighborhoods

After years of strong employment growth and rapidly rising apartment rents, San Francisco’s chronic housing shortage is finally being addressed with an influx of new high-end multifamily developments.

A total of 3,700 new rental units in 17 multifamily projects were added to the San Francisco’s apartment stock in 2016, and 2017 deliveries are projected to surpass that level. More than 1,600 units have already been completed in San Francisco and San Mateo counties through July 2017, and an additional 2,750 units are scheduled to complete construction by the end of the year.

While the total of 4,700 units under construction as of midyear 2017 is above the market's historical average, it still is well below the construction peak for the San Francisco market which occurred in the fourth quarter of 2015 when 8,200 apartment units were under construction.

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Geographically, apartment construction in the San Francisco area has been highly concentrated in the southeastern neighborhoods of SOMA and Mission Bay.

Mission Bay Leads the Way

More than 1,000 apartment units are currently under construction in the Mission Bay/China Basin/Potrero Hill submarket, which includes the Dogpatch neighborhood. The largest of the bunch, Equity Residential’s 855 Brannan St., is a six-story midrise spanning an entire city block from 7th to 8th streets, directly across from Airbnb's headquarters. Pricing for studios at the complex begin at $3,250 per month and two-bedrooms reach towards $5,000 per month.

Housing demand in Southeast San Francisco increased dramatically as technology companies opened large offices throughout the area. It has also become increasingly popular for residents who commute to the Peninsula or South Bay for work. Caltrain’s line to the South Bay begins in the Mission Bay submarket at 4th and King Street with a second stop at 22nd Street beneath I-280 between Dogpatch and Potrero Hill.

Redwood City/Menlo Park 2nd Most Active Submarket for Development

Further down the San Francisco Peninsula, the theme of multifamily development concentrating near transportation hubs continues, particularly in the Redwood City/Menlo Park submarket.

Three of the five major apartment projects currently under construction in this submarket are located within half a mile of Redwood City’s Caltrain station. Redwood City/Menlo Park is currently the second-busiest submarket for apartment construction in CoStar’s San Francisco market which covers San Francisco and San Mateo County’s.

Apt. Vacancy Rising Marketwide

However, as the current wave of new supply reaches completion, renter demand is simultaneously cooling. Local job growth has slowed from an approximate 5% annual growth rate several years ago back towards the US national average near 2%. Due to the market’s supply additions, vacancy has risen above 5% for the first time since the dot-com collapse. Vacancy has only increased significantly at the top-end of the market, however. Competition for affordable and moderately priced rental units remains robust.

Annual apartment rent appreciation reached a cyclical high-point for the San Francisco market in 2015 after five years of extended gains. Rent growth turned slightly negative in the second half of 2016 as new developments competed for tenants, leading some landlords to pull back on aggressively priced units or offer increased concessions.

San Francisco apartment developers are eager to put 2016 behind them as multifamily rents in 2017 returned to an upward trajectory, albeit far more moderate than in the past.

CoStar Market Insights is a new feature providing a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 206 metro areas, with a granular understanding of the projects, players and economic trends that move these markets. Learn how CoStar Market Analytics can add to your market knowledge, helping to minimize risk and maximize returns.


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