Research article

Bay Area Residential Markets

Buyers seeking value in the Bay Area are turning to markets such as Oakland and Napa

Oakland Bay Bridge and port tower

▲ Oakland Bay Bridge and port tower

The expansion of high-value employment in the Bay Area, driven by tech and healthcare sectors, is supporting demand for prime residential real estate. The Bay Area’s population grew by 13% between 2005 and 2015. Wages are rising rapidly as companies in the region compete to attract talent. Although there are some investors present in the Bay Area market, including those from overseas, the residential market story is one of domestic, end-user demand.

Savills data on prime residential real estate in San Francisco shows that capital values grew by 50% between 2005 and 2015 while rents increase by 108% over the same period (Figure 5). Strong rental markets are testament to the occupier-driven nature of the San Francisco markets; some 64% of stock in San Francisco is renter-occupied, compared to 44% across the Bay Area.

High rental demand means that rental growth has been even stronger than capital growth and yields have moved out as a consequence; from 3% in 2005 to 4.2% in 2015. This bucks the trend seen in many global cities where investment activity has pushed yields downwards over the same period. This suggests that San Francisco may still be considered a ‘buy’ for investors as there is no sign of higher rental supply choking off rental growth.

Figure 5

FIGURE 5San Francisco: prime capital values vs rentals

Source: Savills World Research

San Francisco and the Bay Area market trends

With San Francisco at its core, the Bay Area is characterized by distinct sub regions (see map on page 06). The distribution of high-value property sales in these sub-regions is shown in Figure 6.

The bulk of Bay Area prime property is found in San Francisco and the Mid Peninsula, where 79% and 75% of properties sold in 2015 were over the value of $1m. This was an increase of 38.2% and 25.5% since 2009 respectively. In North Bay and East Bay, $1m+ sales accounted for 48% and 33% of total deals, an increase of 19.7% and 20.0%, demonstrating the spread of wealth from San Francisco and Silicon Valley across the Bay Area.

Oakland, in East Bay, has been a major beneficiary of this trend. Prices grew by 183.7% between the market low of Q1 2009 and Q4 2015 as the city attracted those priced out of San Francisco. Oakland is just 15 minutes from San Francisco via the BART, making it closer to the city’s key employment districts than much of San Francisco itself. The price differential is also drawing business occupiers into Oakland in its own right, which further supports residential demand. Residential values in Oakland stood at $450 per sqft in 2015 which is 52% less than in San Francisco.

Outside the urban cores, Napa and Sonoma Counties had benefited from growing demand from those priced out of Marin County, but it was Marin County that was the star performer in 2015, recording price growth of 8%.

In 2009 Napa County was 47% cheaper than Marin County, but by 2015 the discount had eroded to 37%. With the value gap narrowing, North Bay buyers may consider Sonoma County, which still trades at a 52% discount to Marin County.

Figure 6

FIGURE 6Expansion of the million-dollar-plus market

Source: MLS

San Francisco

The strongest performer in the Bay Area during 2015 was the city of San Francisco, where achieved prices increased by 11.1% in the year, according to MLS data (Figure 7). Figure 8, overleaf, shows achieved prices against listing prices and days on the market for San Francisco over the last two decades. Even at the depths of the Great Recession the average discount on asking prices dipped no lower than 2%, a testament to the strength of the San Francisco market. In 2015 properties spent an average of 63 days on the market, down from 94 days in 2009, and achieved an average 11.8% over listing price.

The renaissance of urban living in the US has fuelled demand for property in the Bay Area’s urban enclaves. Existing run-down neighborhoods and districts have been colonized by artists and tech entrepreneurs and been reinvigorated. Established neighborhoods have also benefited and values have been pushed to new highs.

In San Francisco, Hayes Valley, the Mission District, Mid Market and SoMa have seen an influx of tech firms, pushing up commercial rents and in turn demand for residential property. Asking office rents stood at $63.87 per sqft at the end of 2015, 14.1% year-on-year increase, outpacing residential price growth, up on average 6% across the same districts.

Figure 7

FIGURE 7Sales price growth by sub-region

Source: MLS


Development and expansion of the Bay Area is limited by the national parks and bodies of water that surround it. As a consequence, major new developments are typically the regeneration and renewal of existing urban areas.

In San Francisco, Mission Bay, a former industrial area, has emerged as a center for healthcare-led development complete with a UCSF medical and research center, biotech start-up incubators and major commercial occupiers. Hunters Point Shipyard is an 800-acre mixed-use development at the city’s south-eastern point that will deliver 12,500 new homes.

In Silicon Valley, suburban campusstyle office developments and lower density housing means commuters are car-reliant and new development puts further pressure on roads. Apple’s new campus in Cupertino, for example, will have space for 12,000 employees together with garages for 10,980 vehicles. New residential delivery is falling short of in-migration, with affordable housing being in exceptionally short supply. Densification is occurring in some suburban environments, with downtown San Jose seeing more high-rise condominium development.

In light of tight supply in both San Francisco and the Valley, East Bay is again emerging as the major beneficiary. Oakland is seeing its large stock of historic buildings converted into creative office and residential space. A former Sears department store, now Uptown Station, is to be the new headquarters for online taxi firm Uber, while a General Electric light plant in West Oakland has been converted to apartments, for example. New residential condominiums are being developed in the Broadway-Valdez corridor.

Figure 8

FIGURE 8San Francisco market strength indicators

Source: MLS

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