Archive for June 2016 | Monthly archive page

Significant Changes in San Francisco & Bay Area Employment Trends

Analyzing new data (preliminary May numbers) from the CA Employment Development Department indicates a significant shift in Bay Area employment numbers. As seen in the first chart below, looking at the 4 central Bay Area Counties, comparing the first 5 months of last year to the same period of this year, the change in the number of employed residents during each 5-month period went from an increase of 28,100 last year to a decline of 5,000 in this past December to May.

(Santa Clara County continued to grow in number of employed residents, but at a substantially reduced rate from the previous year).

This is the first time since 2009 that the number of employed residents in this area has declined instead of increasing during this period, though this is still relatively short-term data and doesn’t prove a lasting, long-term trend.

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These next 2 charts give longer-term perspectives of year-over-year changes in San Francisco itself.

This first chart below, again, compares changes in employed-resident numbers in San Francisco alone in the first 5 months of each year. (Early 2010 saw a much greater increase, +27,000, but was not included in the first chart for reasons of scale.)

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This chart shows long-term annual changes in employed-resident numbers in San Francisco.

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Changes in employment figures, up or down, typically affect the rental market relatively quickly and dramatically – more so than the real estate purchase market – and that certainly appears to be the case in San Francisco, where softening demand and rents have been widely reported. The big increases in employment, and thus of population, in the past 5 years put immense pressure on rental rates around the Bay Area.

The decreases in employment we’re seeing in 2016 have also been coupled with recent, increased rental inventory construction, albeit most of which has been at the very high end of rent rates. In other words, a possible significant decrease in demand is being coupled with increased supply of apartments available to rent.

Average asking rents have plateaued over the last 3 quarters (first chart below), for the first time since 2011. This may disguise a decline in actual rent rates which have not yet showed up in the statistics. Comparing the annual employment chart above and the second, annual rent-rate chart below illustrates how employment numbers and rent-rates typically move in parallel.

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You might also find our market report from earlier in June of interest: Wealth, Employment, Demand, Inventory, Affordability and San Francisco Home Prices

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Statistics are generalities, longer term trends are much more meaningful than short-term, and we will always know more about what is actually going on in the present, in the future.

© 2016 Paragon Real Estate Group

Wealth, Employment, Demand, Inventory, Affordability and San Francisco Home Prices

Two of the biggest drivers of local real estate demand in recent years have been increasing employment and new wealth creation, both of which exploded in San Francisco and the Bay Area. Approximately 600,000 new Bay Area jobs and 100,000 SF jobs have been added in the past 6 years. IPOs, unicorns and surging stock valuations created thousands of millionaires, dozens of billionaires and trillions of dollars in new wealth. The S&P 500 roughly doubled in the 5 years to mid-2015. Interest rates plummeted. And there was an exuberant optimism that the boom would only continue to soar. Add those ingredients to a deeply inadequate supply of housing and the result is a real estate market boiling over, with skyrocketing home prices and rents

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Chart: Long-term SF Rent Trends

Two of the biggest drivers of local real estate demand in recent years have been increasing employment and new wealth creation, both of which exploded in San Francisco and the Bay Area. Approximately 600,000 new Bay Area jobs and 100,000 SF jobs have been added in the past 6 years. IPOs, unicorns and surging stock valuations created thousands of millionaires, dozens of billionaires and trillions of dollars in new wealth. The S&P 500 roughly doubled in the 5 years to mid-2015. Interest rates plummeted. And there was an exuberant optimism that the boom would only continue to soar. Add those ingredients to a deeply inadequate supply of housing and the result is a real estate market boiling over, with skyrocketing home prices and rents.

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Market Transition, Lull or Short-Term Fluctuation?

But in mid-2015, fears regarding the world economy burgeoned; Bay Area IPOs started to dry up, (over 80 in 2013 to mid-2015; 1 so far in 2016); the valuations of many high-profile IPOs and unicorns declined; and the firehose of venture capital investment slackened. The S&P 500 is now flat year over year and housing affordability has dropped close to historic lows. Hiring slowed and then in early 2016, employment numbers started to decline a little in San Francisco. Some of the wild exuberance leaked out of the general economic optimism, and in the city, demand began to soften a little, while listing inventory started to tick up.

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Chart: Long-term SF Employment Trends

In the first 4 months of 2016, after 6 years of heated growth, the trend in increasing employment numbers in San Francisco reversed itself. This aligns with stories of local start-ups starting to slow hiring and trim staff as venture capitalists have become more demanding. However, this change in hiring could be a short-term phenomenon.

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Since 2012, the spring selling season has been the most dynamic period of median home price appreciation. In spring 2016, after years of major increases, year-over-year house and condo price appreciation basically plateaued.

Note: Virtually every time the analysis is changed even slightly, the result will change. The combined house-condo median sales price ($1,280,000) was 5% higher year-over-year, still way down from its 23% jump seen in 2015. Median sales prices can be and often are affected by other factors besides changes in fair market value.

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In 2016, the supply and demand dynamic shifted somewhat, with the number of listings available to purchase increasing, but the number of closed sales declining. (There was also a significant increase in listings expiring or being withdrawn from the market without selling, an indication of sellers demanding more than buyers were willing to pay.)

Slowing or plateauing appreciation does not imply a crash, and the cooling of a desperately overheated market to something closer to normal is not bad news. Indeed, an improvement in housing affordability (and supply) would be good news, both socially and economically. Likewise, a shift from irrational exuberance in the local economy to rational optimism would be a healthy change.

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San Francisco Luxury Home Market

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As mentioned in previous reports, it appears the luxury segment has softened to a greater degree than more affordable segments (some of which remain very competitive): The number of high-end listings in MLS has jumped, while sales have plateaued or declined. Why the more dramatic change in the luxury condo market? Firstly, increased competition from new, big, luxury-condo projects may be taking a toll (more supply). Secondly, a significant percentage of these very expensive units are usually purchased as second or third homes, not primary residences: When economic uncertainty swells, this is a market segment often affected first (less demand). Note: We do not have access to up-to-date statistics on new-project, luxury condo sales activity, so do not know if that segment has also cooled or is simply cannibalizing the resale market illustrated above.

Based on preliminary data, it appears that accepted-offer activity in May for luxury houses was very strong, possibly even exceeding levels of Spring 2015, suggesting that buyers took advantage of the greater selection of listings to jump in. If so, this will show up in the sales data for June.

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Rental Market Trends

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The rental market is especially sensitive to changes in hiring, and, as illustrated above, asking-rent appreciation has plateaued. It is quite possible that actual lease rents have already started to decline, though no decline has yet shown up in the above statistics. (There is no MLS for reporting actual rents paid, so we have to rely on advertised asking-rent data, which is a lagging indicator.) Clearly, available apartment inventory has grown, and renter demand has softened. Large new apartment buildings have been entering the SF market, with more in the pipeline. This quote is from a June 1 Bloomberg article: Softening apartment rents in New York and San Francisco have forced landlord Equity Residential to lower its revenue forecast for the second time this year, as newly signed leases are not meeting company expectations.

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Important Caveats & Perspective

This recent data measures relatively short-term changes and may reflect only a temporary economic lull or market fluctuation (which is not uncommon). Also, different neighborhoods, property types and price segments in San Francisco are experiencing varying market conditions, from still-quite-hot (non-luxury houses) to cooler (luxury condos).

A staggering amount of wealth yet remains in the Bay Area. Hundreds of local companies worth hundreds of billions of dollars, including the likes of Uber, Airbnb, Palantir and Pinterest, remain in the near-future, possible-IPO pipeline, and economic optimism can shift quickly. Our business environment continues to be the envy of the world, and unemployment rates persist at near-historic lows. San Francisco ranks with the greatest cities of the world in quality of life, even if stressed by growth and housing-affordability issues. Overall city and Bay Area housing supply remains acutely inadequate to recent population increases.

Compared to almost any other in the country, our real estate market remains quite strong as measured by a wide variety of standard supply and demand statistics, and a substantial percentage of San Francisco home listings still sells quickly for well over asking price.

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Advice for Buyers

Buy a home that is affordable now and in the foreseeable future, keeping an appropriate reserve for the unexpected. Buying for the longer term is usually safer than for the shorter term. Lock in a low, fixed, interest rate for an extended period. Expand the list of neighborhoods you are willing to consider and do not just run after brand new listings, but look at those the market has passed by: There will often good buying opportunities with greater room to negotiate. Do not be afraid to make offers below asking price and to negotiate, but carefully review the most recent comparable sales and market indicators. During the summer and mid-winter holiday seasons, the competition for listings significantly declines, and can be excellent times to buy. Be patient: New homes come on the market every day.

Historically, homeownership in the Bay Area has been a good investment, because of long-term appreciation trends, the advantages of leverage, what is called the forced-savings effect (each mortgage payment including principal pay-down), and the many tax advantages. Talk to your accountant or financial planner regarding how these factors might impact you specifically. Admittedly, if one has to sell at the bottom of a down cycle, it can be painful.

Advice for Sellers

There are still plenty of motivated, qualified homebuyers in San Francisco, but do not take for granted that mobs of desperate buyers will show up waving over-asking offers. Price your home correctly right from the moment of going on market as overpricing can have significant negative ramifications. Prepare your home to show in its best possible light: You only have one chance to make the right impression on buyers. Hire an agent who will implement a full-court marketing plan to reach every possible prospective buyer and seize their attention. Stay up to date on comparable listings and sales, market conditions and trends, and adjust appropriately. If you receive an unacceptable offer, do not be insulted: It almost always makes more sense to issue a counter offer instead of outright rejection.

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San Francisco Housing Inventory & New Home Construction

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Above are 2 charts from our updated report which contains a great deal of additional information: SF Housing Inventory & Construction Report

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Statistics are generalities, longer term trends are much more meaningful than short-term, and we will always know more about what’s actually going on in the present, in the future. New construction condos not listed or sold on MLS are not counted in these statistics, though they often affect market dynamics.

© 2016 Paragon Real Estate Group

San Francisco New Housing Construction & Inventory Trends

Many of the charts included below are based on the San Francisco Planning Department’s excellent 75-page 2015 Housing Inventory report, released on May 27, 2016, which can be accessed using the link at the bottom of this article. We are very grateful for the enormous effort put into creating that report by Audrey Harris and other Planning Department personnel.

Numbers in different charts below will not always agree: This is due to the vagaries of how and when condos and other housing units are counted as filed, authorized, permitted or completed by the different agencies who compile this data. As far as the real estate market is concerned, the situation is complicated by the fact that new construction condos are often marketed and “sold” (offers accepted) well before they finish construction, i.e. market dynamics of supply and demand may be significantly affected by units that do not yet exist.

The politics of new home development in San Francisco are not for the weak of heart. There are vociferous disagreements between neighborhood and homeowner associations, developers, affordable housing advocates, tenant’s rights groups, business groups, and pro-, slow- or no-growth advocates regarding how it should best proceed (or not proceed). The battles are non-stop in every political or legal venue available.

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Comparing total inventory (illustrated above) to annual sales reveals that condos and TICs turnover about twice as often as houses in San Francisco. About 2% to 2.5% of all SF houses are now sold each year, an extremely low turnover rate, which has exacerbated the city’s inadequate, house-listing inventory situation. For condos, turnover runs in the 4.5% to 5% range, which is roughly in line with national averages for home sales, and for TICs, turnover is in the 5% to 6% range. These are all very general approximations. Since condos and TICs are typically smaller than houses, and often purchased by younger buyers and/or smaller households – singles, couples, beginning families – it’s not surprising they sell more often than houses, whose owners are often older, more settled in life, and have larger households.

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The process of application and review, public hearings (and sometimes ballot proposals), revisions, entitlement, permitting, construction, inspection and completion is complex and lengthy. Housing units are being planned and built, and existing units are being altered and removed. And there are many housing types: rental or sale units, market rate or affordable, social-project housing or luxury condominiums.

The new-housing landscape in San Francisco is in constant flux: new projects, developer plan changes, city plan changes, and shifts in economic and political realities. The basic fact is that the city, after its recent 2008-2012 new-construction slump, is now experiencing a huge building boom. However, it should be noted that booms can slow dramatically or even come to a screeching halt if economic circumstances significantly change.

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Residential Development by City District

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SF Development Pipeline Map

New construction has been concentrated in a few specific districts of the city, mostly where there are commercial lots able to be converted to residential use and where higher density housing projects are most viable. The ability to take under-utilized commercial property sites and turn them into multi-unit or even high-rise residential projects is particularly prized. Generally speaking this describes the quadrant of San Francisco around and to the southeast of the Market Street corridor.

New Housing Construction by Bay Area County

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Affordable Housing Construction

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Very generally speaking, the city requires that new home developers either dedicate 15% of their units to affordable housing, which could be built on-site or on another city site, or contribute to the city’s affordable housing fund “in lieu” of building the units themselves. (The rules are more complicated than that, and there’s something on the June ballot that will change them further.) There are few subjects more difficult and politically charged in San Francisco than affordable housing: how much should be built where and who should be responsible for the costs.

Affordable housing units are allocated, rented and sold under rules and formulas pertaining to social and economic circumstances and housing cost. Large projects are also built on an ongoing basis by private-public social organizations for dedicated purposes such as senior housing. Looking at the number of units actually being built, there is a general consensus that current construction is deeply inadequate to needs.

In 2015, a total of about $73 million was collected from developers as partial payments of in-lieu fees for projects.

Bay Area Housing Affordability Trends

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Bay Area Housing Affordability Report

San Francisco Housing Units Demolished,
Merged and Removed

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Housing units are gained by additions to existing housing structures, conversions to residential use, and legalization of illegal units. Dwelling units are lost by merging separate units into larger units, by conversion to commercial use, or by the removal of illegal units.

New Development Pipeline

We also have an overview of the quarterly San Francisco Planning Department’s Pipeline Report, which complements the annual Housing Inventory reports with a longer term perspective: The San Francisco Residential Pipeline Report.

There are over 60,000 housing units of all kinds currently in the pipeline – and the pipeline is growing and changing quickly now – but some of the bigger projects (such as Treasure Island, Hunter’s Point/Shipyard, Candlestick Point) may take decades to complete. Also, just because a project is in the pipeline does not mean it will be built as planned, or even built at all.

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Pipeline Analysis, Based on SF Business Times June 2015 Project Breakdown
(A little outdated but still providing useful insight)

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San Francisco Housing Stock Breakdown
A Fascinating 2014 Analysis by the San Francisco Controller’s Office

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The Context behind San Francisco New Housing Development

What ultimately underpins new housing construction is demand. San Francisco has been experiencing surging population, employment and new wealth creation, that has so far been outpacing new housing supply. However, as of spring 2016, it appears that new hiring has slowed, at least in the short term.

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Insufficient Housing = Increasing Prices & Rents

Below are two of our charts illustrating the rental and sale markets in San Francisco. As of spring 2016, it appears that appreciation rates may have begun to finally slow or plateau.

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Condo Values by Era of Construction

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The first golden age of SF apartment buildings, many of which were later turned into condos, was in the period of 1920 – 1940: The units in these buildings are large, light, gracious and filled with elegant detail. Pacific Heights and Marina are filled with these buildings. Though there are beautiful condos built in other eras (Edwardian flats, Art Deco apartments), the second golden age really arrived with the latest burst of new-condo construction, built for an increasingly affluent population: These units are ultra-modern, high-tech and feature highest quality finishes and amenities. They are exemplified by the new, luxury high-rises of the greater South Beach-Yerba Buena area, though variations on this theme, in non-high-rise form, have been springing up all over the city.

The units in these newer buildings command a premium both when rented or, as seen in the chart above, when sold – now surpassing an average dollar per square foot value of $1000, and sometimes far above that. This is the major motivator for developers today, many of whom are now concentrating on luxury or what might be called ultra-luxury condo construction. There is a question as to whether the luxury segment is being overbuilt considering the size of the buyer pool for such expensive units.

Housing Unit Construction by Bedroom Count

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We haven’t found an easy place for construction data by unit size, so this first chart above is extrapolated from SF MLS sales of condos built 2001 -2015. It may not apply perfectly to units built as apartment rentals or affordable housing.

Typically, the smaller the unit, the higher the dollar per square foot value on sale or rental, however in San Francisco, 3+ bedroom condos are often high-floor units with spectacular views that sell for extraordinary sums – but these would be outliers to the general rule.

Below are links to the SF Planning Department Pipeline and Housing Inventory report webpages. They contain a huge amount of data, which we have attempted to represent accurately. As noted by their authors, who did an incredible job, the original reports themselves are “compiled and consolidated from different data sources and subject to errors due to varying accuracy and currency of original sources.”

2015 SF Planning Department Housing Inventory Report, Issued May 2016

San Francisco Planning Department Pipeline Report

SF Development Pipeline Map