SPECIAL FOCUS: AFT’s Top 50 Apartment Markets

APARTMENT FINANCE TODAY • OCTOBER 2007

NO. 1 • SAN JOSE: The Wildest Ride

By Dana Enfinger

Entering the apartment market in San Jose, Calif., is a lot like being a kid waiting in line in high summer to ride the Indiana Jones Adventure at Disneyland for the first time.

Once you board that car, you forget your sore feet, the sunburn, and the notion that after one hour of waiting you were ready to leave the line to find some shade and frozen lemonade. Why? You found the thrill you were looking for.

The San Jose market took the crown in our analysis of the top 50 apartment markets, thanks to steady household growth and a hefty gap between asking rents and mortgage payments.

“There’s no other market that’s as extreme as this,” said Sam Chandan, chief economist for Reis, Inc., a New York City-based real estate research firm. “If you look back five years, in terms of rent growth, it is the worst market in the country—79th out of 79 markets. On a five-year projection, San Jose is in the top five performing markets in the country. It doesn’t get more volatile than that.”

The main reason for the volatility is the lack of job diversification. No other city on the planet is as heavily concentrated in the technology field. Of the nearly 930,000 residents, more than 254,000 work in the technology sector. Employers expect to add 19,800 jobs in 2007, an increase of 2.2 percent. Although hiring was more active last year, when 23,900 positions were created, job growth in the region has been fairly steady since 2004. After suffering years of population loss in the wake of the dot-com bust in 2000, the San Jose region is finally expanding. It is now the third-fastest growing city in California. Job growth is definitely smoothing the ride for apartment investors.

The affordability gap

San Jose’s lack of home affordability is also shaping the market. In June 2007, the median price of an existing single-family home in the metropolitan area was $788,000, according to the National Association of Realtors. That was the highest sales price in the country and made San Jose the sixth-least affordable market for homebuyers. Despite healthy rent increases, many are choosing to rent versus own.

Even with the crisis in the mortgage market, the rental market should stay strong in San Jose, said Ken Gladstein, senior vice president for real estate developer and manager Sares-Regis Group of Northern California, based in San Mateo, Calif. The firm recently acquired The Plaza International Apartments, a 44-unit complex about 20 minutes outside San Jose, in Palo Alto.

“The crisis in the residential mortgage market should help the rental market, especially in San Jose,” said Gladstein. “The mortgage capital is not going to be there for those with marginal credit, and they’re going to stay renters.”

The other market driver here is limited supply. It’s difficult to get entitlements to build, said Gladstein. High construction costs have also minimized the number of units in the San Jose pipeline, keeping vacancy rates low.

“The greater the reward, the greater the compensating risk,” said Chandan. “But you can’t argue. San Jose is now the top of the pack.”