It was hard enough to build apartments in high-cost cities like San Francisco before the pandemic triggered an exodus from urban neighborhoods, and now the economics are even tougher. But that’s giving smaller cities a chance to catch up to the rental boom that previously lifted other non-coastal metros like Austin and Denver. For builders, it’s a riskier calculation.
The divergence in the rise and fall of rents between high-cost and low-cost metro areas means it makes better sense to build apartments in places like Spokane, Washington, than San Francisco — at least in the short-term.
Basically overbuilding in sleepy towns like Spokane and Boise in the short run, and underbuilding in SF. But the low new supply will eventually push rents to new high:
Another, more sobering thought is what all this might suggest for rents down the road in San Francisco. If the increase in construction costs is permanent, to get back to pre-Covid economics for apartment developers we might need to see market rents that are far higher than they were in early 2020. Maybe it’ll take one-bedroom apartments going for $4,000 a month to get the dirt moving on multi-family housing. And until that happens, fewer housing units will be delivered in the city over the next couple years than we otherwise would have expected. It’s possible the current lower-rent period is just a passing reprieve for Bay Area renters, similar to how things were for a few years after the dot-com bubble burst in the early 2000’s — before rents soared to previously unthinkable heights.