San Francisco and the surrounding Bay Area are well known for affordability issues. Rents consistently place among the highest in the nation. While many Silicon Valley tech employees can afford astronomical rents, many others cannot. How have these affordability issues impacted renters and multifamily investors?

The Bay Area's Commuter Crunch

The region's high rents have long impacted demographics. Populations have gradually shifted, with more and more workers seeking less costly housing further away. That's translated into longer and longer commutes.

The Bay Area Council Economic Institute cites a 2018 study which found that more than 187,000 people were commuting to the Bay Area from outside the region every day. Many of these commuters come from as far away as Sacramento. During peak driving time, that can mean two or more hours each way.

The pandemic changed things, of course. Households previously trapped by commuting distances were set free, in a sense, to work from virtually anywhere in many cases. Commuting ground to a halt for a while, but San Francisco Business Times reported at the end of 2021 that traffic was back to pre-pandemic levels already.

The Renters Who Remained

But what about those who never moved halfway across the state? On the surface, you might expect that they would start paying lower rents. After all, renters moving out of the area will no longer factor into demand, nor will they be absorbing new units that come to market.

And for a while, rents did indeed drop in 2020. The region's luxury units were the most impacted, though — workforce housing prices held steady. Lower-income renters weren't usually the ones moving hundreds of miles to swap housing for commutes, after all.

San Francisco Rent Growth Lags the Nation

As the wider market returns to the pre-pandemic normal, rent growth has become a fact of life once more. Renters may get some comfort that growth in San Francisco has thus far lagged behind the national average and other major metropolitan areas.

Yardi Matrix's latest multifamily report pegs year-over-year rent growth at 9.7% in San Francisco, far less than the 13.7% national gain. For the South Bay, things have moved a bit differently: Rents there increased 14.8% over the year. Much of these increases tie in to household formation in — and migration to — the area. Both figures are likely to moderate by the end of the year, however.

Luxury Housing's Investment Risk

But aside from the renter perspective, how does multifamily investment in the Bay Area look? For one thing, the spikes and troughs of rent growth highlight the uncertainty in the region, particularly for those who own or operate luxury housing.

The net operating income for a high-end multifamily asset in San Jose may be fantastic now, but what happens in the next recession? Sure, population shifts may not be as pronounced as in the early days of the pandemic, but the first properties to take a hit are generally those catering to renters with the greatest amount of disposable income. Subtract vacancy costs from a community's income, and you may not be left with much — or anything, depending on the financing you have in place. And it's hard to ignore the financing angle. With interest rates climbing swiftly, time could be of the essence — if, that is, you can get a fixed-rate loan.

Bay Area Affordable Housing: Always in Demand

Which multifamily sector is the safest play, then? Affordable housing and workforce housing assets offer security in terms of occupancy, at the very least. And while rents did begin to fall for a bit in workforce housing in 2020, losses were far milder — and the recovery much swifter.

When it comes to affordable housing, meaning properties using Low-Income Housing Tax Credits or designated as affordable under HUD's Section 8 program, even more stability comes into play. Demand will always be present, and while rental income may not be quite what you'd get from a $10,000-per-unit-per-month Class A property in Potrero Hill, you'll likely never need to worry about filling vacant units.