Southern Neighborhoods See Inventory Spike

Last November, we noted that apartment inventory San Francisco's South of Market neighborhood had shot up 100% in the past year. The trend has continued, with inventory city-wide up more than 50% since this time last year.

Anecdotes and our own experience in the market confirm the trend: apartments are getting harder to rent. Rents haven't dropped (yet), but short of a big spike in demand in the near future, it's only a matter of time. It's no coincidence that the spike in demand in the chart above happened last fall, right around when big tech companies started pulling back on hiring.

But apartments don't rent on a city-wide basis, so let's look at the same data drilled down to the neighborhood level. The results may surprise you.

The biggest jumps in inventory are concentrated in southern neighborhoods like Visitacion Valley, Bayview and Western Addition. Notably, these are areas without much new construction supply. So what's causing the jump in supply?

Our view is that there are two primary factors at play. The first is that landlords in these areas have liken got a bit overzealous in what they think they can ask for rentals. It's hard to blame them, with the market screaming higher for the past few years, prospective tenants were willing to pay basically anything, even to live in these more far-flung areas. Now that demand is tapering off, inventory is sitting for longer without any bites.

Second, tenants out there in the marketplace now have more options to choose from so can be a bit pickier. Can't find that perfect spot in the Mission? No need to rush off to Western Addition because it's the only place you can afford. Core markets like the Marina, Nob Hill and even the Mission haven't seen nearly the spike.

What's next? It's not hard to guess. Prices have held steady up until this point but as pressure mounts, falling rents are very likely on the horizon.