Bay Area Real Estate Will Remain Red Hot – Here’s Why

Lured by high paying and, dare I say, glamorous tech jobs, Millennials are flocking to California’s Central Coast (San Jose, the Bay Area and Silicon Valley) in droves.

In many cases, for many young demographics, Silicon Valley is bigger, better and more glamorous than Hollywood could ever be.

As we have discussed many times before, today’s mobile generation goes where the jobs are instead of waiting for the jobs to come to them. This is a good trend. People should not remain in what corner of the world just because they were placed there at birth.

It is not surprising, with all the money floating around, that the Bay Area housing market is scarce. It is also expensive, really expensive.

In fact, the average rent in Silicon Valley is the highest in the nation. Narrowly beating out another hotspot of entirely different stripes – Honolulu, Hawaii.

But yet your youthful ambition dictates that you have to give it a shot at the big time. Your big time is the Silicon Valley and you have to live somewhere when you arrive.

The Bay Area Rental Market

Investors take note of these stats. Oh, bring your checkbook too.

The average asking rent in the nine-county Bay Area hit $2,158 a month in the second quarter of 2014 — an increase of 5.6 percent from the first quarter and 10.3 percent from the second quarter of last year, according to a survey by RealFacts.

San Francisco leads the way with the average rent coming in at a whopping $3,229.

So, what exactly does that get you? Average rents are $2,583 for a studio, $3,042 for a one bedroom/one bath unit, $4,248 for a two bed/two bath unit and $4,039 for a three bed/2 bath apartment. A three-bedroom town home averaged $4,370.

In  Santa Clara County about 4,100 new units have entered the market in the past year. That’s more new inventory than in the previous four years combined, when just over 3000 units were built – TOTAL.

Yet, despite the additional inventory, rents in San Jose hit $2,169 in the second quarter of 2014, up 9 percent year over year. That was only slightly lower than the previous year, when rents rose 9.8 percent.

It wasn’t San Francisco or San Jose that lead the charge on higher rents though. It was Oakland. The average asking rent there jumped to $2,421 in the second quarter, up 10.6 percent from the first quarter and a whopping 19.1 percent year over year.

Other Bay Area cities with big rent increases over the past year include Petaluma (18.7 percent), Belmont (16.6 percent), Milpitas (15.7 percent), and Hayward (14.9 percent).

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So what exactly is the problem here and where is the opportunity for real estate investors?

The answer lies in our opening paragraph – JOBS.

The Bay Area / Silicon Valley Job Market

The job market is so hot that housing isn’t keeping up – by a long shot.

The Silicon Valley / Bay Area added 23,000 jobs in AUGUST. Yep, in one month they added 23,000 new jobs.

Let’s put that in perspective, shall we? If this lovely corner of Central California was its own state it would have been the #1 state for job growth in the US.

Florida, the entire state, added 22,700 new jobs and Texas added 20,100.

To break it down a little further; Santa Clara County added 13,600 jobs, the San Francisco-San Mateo-Marin region gained 5,500 jobs, and the East Bay added 2,200.

You may be thinking that adding jobs doesn’t always mean that you are adding new residents. You’d generally be right, but the numbers in the Bay Area suggest otherwise.

They suggest that people are moving here, a lot of people too.

San Francisco took on 10,617 new residents in 2013, but added only 2,277 new housing units. Santa Clara added 5,245 new units for over 27,600 newcomers. And Alameda added 2,474 new units for 23,135 new arrivals.

Those numbers are problematic for most, but for a real estate investor they are double-take material. The Bay Area needs supply and not just a little supply, they need a lot of supply in a hurry.

The tech boom will eventually slow, but with a continual flow of high profile IPO’s from GoPRO, Alibaba, Atlassian, Zendesk and now PayPal, it doesn’t appear that the end is near.

That means more jobs and more housing needed. And thus, the red hot Silicon Valley real estate market will remain so.

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