The Bay Area is Back! What the Data Tells Us

The Bay Area is Back! What the Data Tells Us
By: Brian D. Milovich, Managing Principal, Calvera Partners

We love the San Francisco Bay Area. It’s been a source of so much good for Calvera, my co-founders, and me. But since COVID, it’s also been a really tough place to do business. So tough that we haven’t felt comfortable investing there. A prolonged eviction moratorium, elevated crime, and the lack of a return-to-office push from Big Tech made most of the Bay Area effectively un-investable to us. It’s been much easier to operate 2,000 miles away in more business-friendly, but still competitive, markets like Texas.

And yet, the Bay Area is calling us back. Not because Daniel Lurie, San Francisco’s new mayor, is telling us to, but because the opportunity feels real. San Francisco is the most interesting place to consider investing in today. It’s awakening from a long slumber, thanks to an aggressive push from the new mayor and his friends. There’s a palpable energy that “the City” is coming back. Office leasing is picking up, new investment is coming in, and there’s a real focus on crime and cleanliness. Let’s not forget that AI (artificial intelligence) is a real growth engine, and all the major AI players have a home in San Francisco. The city isn’t fully back yet, but we believe it will be—soon. That makes now an ideal time to consider investing in its resurgence.

Silicon Valley doesn’t have the same mayoral energy (or PR machine), but the fundamentals are similar. It needs more employees back in offices, will benefit from AI’s rise, and must also address crime and cleanliness. We’re witnessing it firsthand at our property in Mountain View. While we haven’t had a vacancy since last October, asking rents in the neighborhood today are 3%+ higher than 6 months ago. That’s just the beginning. We’re bullish on Silicon Valley (from San Francisco to San Jose) and select parts of the East Bay.

But don’t just take my word for it. The numbers speak for themselves. In the chart below, among the top 50 major US markets, the San Jose MSA ranked #5 (+3.4%) and San Francisco #12 (+2.9%) in effective rent growth over the past year. Both areas are well above the national average of 0.4%. The other markets outperforming on this list either already had a supply boom or never had one. Meanwhile, most of the lagging markets are in the Sunbelt, hampered by record levels of new apartment supply. Don’t count those markets out—they’re projected to have some of the highest rent growth once they absorb all the new units. They’re still rapidly growing, but the Bay Area is already on the move.

Drilling down into specific Bay Area submarkets, we see that Silicon Valley leads, with several neighborhoods performing well. San Francisco’s SoMa neighborhood (primarily Mission Bay) has surged, driven by the Chase Center arena, where the NBA’s Golden State Warriors play, and increased office attendance. Oakland and the outer East Bay, however, continue to underperform.

Not all the Bay Area piques our interest, though. We remain wary of Alameda County (Oakland) and tertiary parts of the Bay Area, as demonstrated by the data and our own experiences. Oakland’s issues, in particular, are deep and require radical change. We’re hopeful the new mayor in Oakland can bring positive results. A stronger Oakland is good for the Bay Area—it benefits everyone when each major city encourages new investment and becomes a place people want to live, work, and play.

We’re not pivoting back to the Bay Area—we never left. The opportunities we’re seeing today remind us of when we first started Calvera. That means properties with fewer than 50 units, built in the 1960s or earlier, with below-market rents, and with renovation potential. The difference today versus 15 years ago is that the deferred maintenance is no longer optional. More cities are requiring soft-story retrofits for earthquake safety. Old electrical panels (in-unit and mains) must be replaced to maintain insurability. And unit renovation costs are much more expensive.

What hasn’t changed is the upside, and the area’s aversion to new apartment supply. Unlike the Sunbelt that got hammered with new construction, the Bay Area has a demand problem. And demand is already improving, as shown by the rent growth numbers over the past year. We believe it’s only going to accelerate. While others wait for rents to come back in the Sunbelt, we’re focusing even harder in our own backyard.