JLL’s Q2 U.S. Multifamily Investment Outlook reports that Silicon Valley and other Western regions have seen annual rent growth gains between 5.8 and 6.3 percent, while national rent growth has softened to 4.5 percent. Investors can expect West Coast multifamily rents to keep pace with, if not exceed, the national average as long as employment and population growth continues to outpace development. In markets with such significant barriers to entry, we are not seeing any signs of a slowdown. In addition, strong venture capital funding continues to fuel West Coast markets’ performance.
The attraction to Silicon Valley
Consider Silicon Valley: the market was one of the first major U.S. metros to rebound from the Great Recession, driven heavily by high technology employment growth as well as a large concentration of venture capital funding. While large employers were shedding jobs, Silicon Valley added six-figure salaried jobs, driving total income up by 45.0 percent in six years. These jobs attracted the brightest minds in the country and the Bay Area population started to grow at a faster pace than the housing stock could handle.
In 2015, an average of 126 people moved to the Bay Area each day, capping off 2010-2015 household formation at ten times greater than residential development. The region is expected to continue expanding faster than any other major region in the state through 2020, largely due to employment growth stretched to all areas of the market. This has resulted in record demand in supply constrained markets, which experienced minimal development during the past several decades and has performed consistently above national rates, and a doubling of national averages since 2014, pushing Bay Area home prices to levels that most residents are unable to reach.
Affordability has been a great concern for employees as well as employers. With the high cost of office space and housing, technology is driving alternative location choices and building characteristics for developers, investors and occupiers. Technology employers are opening offices in West Coast alterative tech hubs, such as Seattle, Portland and Los Angeles. With this new employment, these markets have seen record populating growth and record rental increases much like the Bay Area has experienced.
Venture capital funding is a key indicator of the technology sector’s strength and stability and Employers are hiring and expanding at record levels. Today, 60 percent of all venture capital funding is being deployed in West Coast markets. As of August 2016, technology is still growing 2.6 times faster than the overall economy and is expected to remain a critical component of the labor market.
With household formation and employment outpacing construction, absorption has retained strength in spite of the sustained level of deliveries.