Developers cautiously optimistic on residential market in San Mateo County

“People are still renting apartments, so from an operation standpoint, existing apartments are operating well, but their valuations have been hit because of capital markets,” Drew Hudacek, chief investment officer and managing partner of Sares Regis, said. “Because of the different valuation, which is much lower today than it was five years ago, it’s almost impossible to justify building new apartments right now.”

But with more employees working in office and a slower rate of population decline — possibly attributed to households moving back after the pandemic — Mike Field, principal at Mecah Ventures, said he is cautiously optimistic.

“I think there’s going to be some pretty large-scale lease transactions that occur over the next couple of months. The more that technology companies come back to the leasing market, that’s when we’re really going to see the lenders get excited about constructing new buildings,” Field said. “Most of the companies now have some in-office policy, and it appears that people who left the Bay Area during COVID are starting to come back, and that is definitely going to drive rent growth.”

Average rents in many San Mateo County jurisdictions are still lower or the same compared to 2023, but the gap has narrowed over the last couple months and has often surpassed last year’s figures when looking only at apartments and condominiums. Since July, the average rent for an apartment or condo in Redwood City has been higher compared to the same time last year, according to Zillow data. That may signal promise for lenders which will help unblock financing hurdles and revitalize a somewhat dormant pipeline, Field said.

“Rent growth, in connection with the federal government reducing our borrowing rates, has the ability to bring a lot of projects back into the green,” Field said.

That is also good news for many cities as they try to meet their state-mandated housing goals which are more aggressive during this 2023-31 cycle than the previous round. San Mateo County’s total targets, or Regional Housing Needs Allocation, increased by about 4% between the 2007-14 and 2015-23 cycles. But from the last cycle to the current 2023-31 round, there was a nearly 200% bump. Cities only need to show they are implementing the right mix of zoning policies and programs that would theoretically allow developers to build their assigned number of housing units, but municipalities showing little progress are still at higher risk of state-imposed consequences.

Hudacek said Sares Regis has turbocharged its commercial and industrial-to-residential conversion approach. Given the elevated office vacancy rates, particularly in areas that are not situated in a busy downtown or commercial hot spot, he said it makes sense to capitalize on existing site infrastructure and infill development.

The company completed Village Walk in Belmont not long ago, comprising 15 townhomes, which was city-owned property that mostly housed shed buildings for equipment storage. And other projects, like an anticipated 56-townhome development in Redwood City, is also using a space that was previously commercial.

The approach is also a win-win for office building owners, whose property valuations are much lower than just a handful of years ago, Hudacek said.

“We’re looking at those neighborhoods where the office or [research and development] buildings are empty and obsolete, and the cities have already predestined by general plan or zoning that those parts of town should go residential,” he said.