The investment sales community laments that persistently high lending costs have dampened sales in San Francisco’s multifamily investment market.
But that disappointment has yet to affect sales volume. Total sales in San Francisco in the first quarter of 2025 are on track to equal the total for the final quarter of 2024, the highest quarterly total of the past five years.
Buying activity was boosted in the second half of 2024 as Treasury rates fell to 3.6% in September. However, the 10-year bond rate increased again at the end of the year, peaking at 4.8% in January. Rates have dropped since but haven't approached 4%; they're at 4.3% currently.
Some industry insiders have noted that the deals that have closed in the past few months comprise acquisitions that went into contract while rates were lower. This would make sense, given that recent sales include several larger deals, which typically take longer to finalize.
The increase in transactions involving larger apartment complexes coincides with the return of institutional and REIT buyers. These participants have accounted for more than half of deal volume over the past three quarters, a notable change from the previous four years, when private buyers and smaller deals were the norm.
In February, Essex Property Trust led the REIT acquisition activity, acquiring three apartment properties in Foster City and Menlo Park. The largest was The Plaza, a four-star mid-rise complex of 307 units acquired from Northwestern Mutual for $161 million, or $526,000 per unit.
That deal, which had a reported cap rate of 4.25%, is one of several examples that indicate pricing may have bottomed in San Francisco. The average cap rate, which mostly reflects transactions of smaller and older two- and three-star buildings, has remained around 5.6% for the past three quarters. This is around 150 basis points above the low point set in 2022.
The average cap rate is projected to move lower in 2025 as buyers sense that pricing is on its way up again and compete to deploy capital at the opportune point in the cycle.
Investors are attracted by the narrative that San Francisco’s multifamily market is recovering, with lower vacancy rates and higher rent growth. However, elevated Treasury rates and increasing economic uncertainty will likely continue to be a drag on investment sales in the second quarter.
