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One of the Bay Area’s biggest apartment builders sees a development slowdown

February 1, 2018

By Roland Li : bizjournal – excerpt

Equity Residential, one of the nation’s and Bay Area’s largest apartment developers, said Wednesday that building new housing is becoming more difficult in all major U.S. cities and that it expects fewer projects moving forward.

Chicago-based Equity Residential (NYSE: EQR), which controls 54 properties with 12,961 units in the Bay Area, cited higher construction and land costs and less abundant financing for the slowdown.

“Turning to development, it is becoming more and more difficult and land prices remain strong. And the growth in construction costs continue to outpace rent growth significantly reducing development yields,” said David Neithercut, CEO of Equity Residential, on a quarterly earnings call on Wednesday.

“Nevertheless, development capital appears to still be available around the abundant supply for the right sponsors with the right deals. For the rest of them, it appears that putting together a capital stack is becoming harder and harder. Our construction financing does remain available but at lower advance rates and wider spreads, while requiring more capital support. To us this all adds up to fewer starts and hence fewer deliveries in the very near future,” he said.

The collision of rising costs and softening rents has slowed the number of new housing proposals in the past two years in San Francisco. Developers have also blamed the city’s higher affordable housing requirements for making projects harder to build. …(more)

Around 7,100 units were under construction in San Francisco in the third quarter of 2017, according to the city. Only a handful of large projects totaling 1,500 units are expected to open this year, down from around 5,000 units delivered last year. Oakland has seen more projects proposed in the past two years, in part because land costs are lower and approvals are faster than San Francisco, but construction costs have meant most projects are cheaper midrise, wood-frame developments.

Neithercut said Equity Residential hasn’t purchased a land parcel in any of its markets since 2015, but will continue developing sites it owns and will consider new deals. In 2015, Equity Residential bought 667 Folsom St. in San Francisco’s South of Market neighborhood. It received approval for 230 units in January 2017. Neithercut said the company is targeting 5 percent to 5.5 percent returns on cost for its new projects.

Equity Residential saw “weakness” in San Francisco in 2016 and offered concessions such as a month of free rent to fill new buildings. But the company said 2017 was an improvement.

“In 2017, San Francisco produced 2 percent revenue growth, which was better than we expected, but not beyond what we thought could happen. The growth here was again better than expected,” said David Santee, Equity Residential’s chief operating officer, said on the earnings call. The company also said 2018 has been the “best start in the last three or four years.”

Equity Residential had a 95.9 percent occupancy rate in the Bay Area and average monthly rents of $3,089 at the end of last year. Its new San Francisco projects include the 449-unit, $304 million 855 Brannan St., which was 55 percent leased at the end of the fourth quarter. The 241-unit, $169 million One Henry Adams was 96 percent leased.

In 2018, the company expects Los Angeles to be its strongest market, contributing 35 percent of the company’s portfolio-wide revenue growth. San Francisco is expected to contribute 20 percent of portfolio-wide revenue growth, the second highest among cities. New York, where 19,000 housing units are expected to be completed in 2018, is expected to be the company’s weakest market contributing to a 10 percent decrease in portfolio-wide revenue.


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