COVID-19 Effects on California’s Multifamily Market

April 2, 2020

COVID-19 effects on California's multifamily market differ by cities.

• Los Angeles is California's COVID-19 epicenter but is still expected to minimize vacancies.

• San Francisco's tech sector continues to occupy multifamily properties.


Bustling Cities Amplify COVID-19 Risks

Every day, cities around the world are experiencing impacts of the coronavirus. As of March 30, in the U.S., two-thirds of the COVID-19 cases nationwide have clustered in the states of New York, New Jersey, Washington and California. On that day, in a webcast, Moody’s Analytics zeroed in on one of these states, reviewing COVID-19 effects on California’s multifamily market.

Victor Calanog, head of CRE Economics at Moody’s Analytics REIS, pointed out that cities with vibrant international cultures, business centers and convenient public transportation attract people. He stated, ironically, destinations where people gravitate to visit, work and play, are also predisposed to higher transmissions of the virus.

L.A. Is California’s COVID-19 Epicenter

Los Angeles, Santa Clara, San Diego, San Francisco and Orange County rank as the state’s top five counties for COVID-19 cases, according to the Centers for Disease Prevention and Control. More than 25% of California’s cases are in Los Angeles County, making it the state’s epicenter. There were approximately 800 cases as of Friday, March 27, according to the county’s department of health. Calanog noted that over the weekend, by Sunday, March 29, the number of cases spiked to 2,100.

L.A. Multifamily Expects Minimal Vacancies

“We were expecting close to 17,000 units to come online at the end of 2020. This was prior to the outbreak of the coronavirus,” said Calanog, referring to Los Angeles multifamily. “That would have been the highest figure for new completions since 1990.” However, he pointed out that in a severe pandemic, the projected pullback in the supply growth represented a 21% drop compared to the baseline inventory (defined as anticipated supply without the coronavirus pandemic).

With the worst-case scenario, a protracted slump, Los Angeles would see a 39% drop in supply relative to the baseline figure, according to Calanog. However, the vacancy even with a protracted slump would only be about 5.2%, he said, adding 2019 ended with a very tight 3.8% vacancy rate.

Orange County Multifamily Expects Less Supply Pullback

Orange County’s supply growth over the last few years had not been as strong as that of Los Angeles. The area expected only about 2,400 units to come online in 2020, said Calanog. The projected construction pullback would amount to declines in the supply growth by 15% under a severe pandemic and by 31% under a protracted slump. He added vacancies are expected to top out at 5.4% in 2020, before recovering in 2021.

San Francisco: Tech Sector Supports Multifamily

“San Francisco apartment deliveries reached a record high in 2016 with over 3,600 units opening their doors that year,” said Calanog. “The previous high was just under 3,000 units.” The city’s vacancy rate rose from 3.2% in 2012 to a high of 4.8% in 2016, and in 2019 it dropped to 4.0%.

“Demand for San Francisco multifamily has generally outstripped even record-high supply growth with the tech sector at center-stage, creating jobs and supporting household formation,” explained Calanog.

In the downturn scenario of an extended slump, the city’s multifamily sector would experience some reversal in its relatively strong fundamentals. Its vacancy rate would be expected to increase from its 2019 year-end rate of 4.0%, rising to 5.9%.

However, Calanog also noted that construction and vacancies are only part of the market fundamentals picture. San Francisco and San Jose tend to have relatively stable vacancy patterns for multifamily, but very volatile rent growth, he said.

The economist explained assessments of the potential impact for each city’s multifamily market need to consider the following: effects of changes to the supply side, balanced with demand; historical reactions of submarkets and property types during downturns; and the relative strength or weakness of specific markets on both the demand and supply sides before the onset of any downturn.

The Future Is Still Unfolding

The effects of COVID-19 are still evolving in real-time with rapidly moving parts. Calanog said there are factors that experts cannot ascertain at this moment. For example, he pointed out no one should discount the possibility of a major upside once the economy reopens.

Pandemics can resemble unforeseen disasters such as earthquakes, hurricanes and terrorist attacks. How do some areas such as the San Fernando Valley after the 1994 Northridge earthquake and Downtown Manhattan following the 9/11 terrorist attacks rebound and even see escalations in property values? On the other hand, there are examples such as New Orleans, which never fully recovered its population following Hurricane Katrina. How will COVID-19 affect the amount and quality of the demand for real estate? Calanog opined that story is still unfolding.