With the January inauguration of the new administration came a number of changes that have injected uncertainty into some important aspects of business which may have a ripple effect into the San Francisco real estate market.
The first change is the executive order to ban non-U.S. citizens entering the U.S. from certain countries. This caused an immediate employee travel ban by a several prominent San Francisco and Bay Area employers for employees potentially affected by the ban. Second came the announcement that the administration plans to double the qualifying salary threshold from $65,000 to $130,000 for an H-1B visa, making it much harder for employers to fill positions with foreign talent, a not insignificant source of employees in the high tech sector. Both of these injected uncertainty and potential business disruption into the Bay Area business community and both have received broad coverage in the business and general news, with some high-profile CEO’s speaking out against them because of fears of damage to their businesses.
On a stabilizing note, mortgage rates eased off just slightly (about 1/8 percent) in January. However, most lenders expect them to rise somewhat throughout the year, to around 5%.
The charts on the following pages graphically depict the same message we’ve seen for the past few years: San Francisco remains a strong single family home sellers market, with incredibly low inventory at 1.3 months, down 10% from January 2016. Median sales prices are up 7.1% year-on-year for single family homes. The median sales price of single family homes also continues to be bid up above list price, coming in at 105.9% for January.
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.
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.
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.
Residential Development by City District
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
Affordable Housing Construction
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
San Francisco Housing Units Demolished,
Merged and Removed
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.
Pipeline Analysis, Based on SF Business Times June 2015 Project Breakdown
(A little outdated but still providing useful insight)
San Francisco Housing Stock Breakdown
A Fascinating 2014 Analysis by the San Francisco Controller’s Office
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.
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.
Condo Values by Era of Construction
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
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.”
The bar charts compare year-over-year data, going back 2 years, for the latest month. The line charts track monthly data over a period of 3 to 5 years. Note that it can take 7 to 15 days after a month’s end for agents to enter in transaction data pertinent to the month in question, so statistics for the latest month can sometimes change significantly as this data is added to calculations.
Seasonality can play a significant role in many real estate statistics as the market ebbs and flows during active and less active sales seasons. Typically, the market is most active in the spring and fall, and slower in the summer and, especially, the mid-winter holidays. The luxury home market is even more deeply affected by seasonality than the general market.
To keep things simple, we have, rather arbitrarily, designated homes of $2 million and above as luxury homes. The threshold should be higher for houses (probably in the $2.5m to $3m range), and somewhat lower than $2m for condos, but then we couldn’t get both property types on the same charts. Needless to say, what one gets for one’s money in different neighborhoods varies enormously. Statistics are generalities, most useful for illustrating general market trends.
Moving your cursor across any line chart will pull up month by month data. It may take these auto-updating charts a few moments to load onto the webpage.
New Listings Coming on Market, by Month
September is usually the single biggest month for new high-end home listings. Spring is typically the most active season for new listings. New listing activity plunges during the mid-summer and mid-winter holidays.
Total Number of Active Listings for Sale during Month
Number of Listings Accepting Offers, by Month
Number of Sales, by Month
Percentage of Listings Selling for over Asking Price, by Month
Median Percentage of List Price Achieved on Sale
Over 100% usually signifies competitive overbidding; under 100% signifies more aggressive buyer negotiation.
Median Dollar per Square Foot (upon Sale)
3-Month Rolling Average
Months Supply of Inventory (MSI), by Month
The lower the MSI, the greater the buyer demand as compared
to the inventory of listings available to buy.
Median Days on Market before Acceptance of Offer
3-Month Rolling Average
Expensive Home Sales by San Francisco District & Neighborhood
Note that these charts using differing price points for the “luxury home” designation.
Other reports you might find interesting:
It is the relationship between supply and demand that defines the state of the market. Looking at one statistic such as the number of sales, without comparing it to how many listings were available to purchase, may give a distorted view of market conditions. Some statistics, such as months supply of inventory take both supply and demand into account. Last but not least, short-term statistics sometimes fluctuate without great meaningfulness – longer-term trends are always most meaningful.
Sales data usually reflects market activity, i.e. when a new listing comes on market and offers are negotiated, occurring 4 to 8 weeks before the sale date. Thus, for example, sales in June mostly reflect new listings and offers negotiated in late April and May.
The SF Planning Department just released updated Q4 2015 information regarding the new-housing development pipeline. San Francisco is in the midst of one of its biggest new-housing construction booms in history. (The same is occurring on the commercial development side, but this report won’t deal with that.) Indeed, it often seems that new projects of one kind or another are being announced on an almost daily basis, and a detailed map delineating all projects in some stage of the pipeline makes many city districts appear to have measles.
New housing construction has lagged population pressures for decades – pressures which have soared during the current economic and employment boom – and now there is a scramble to address the inadequacy of housing supply, and, for developers/investors, to reap the rewards of a high demand/low supply dynamic in one of the most affluent and expensive housing markets in the world. Of course, one of the questions now is at what point might new inventory succeed in fully meeting market-rate buyer and renter demand, and possibly proceed to an over-saturation point, thus significantly changing the supply and demand dynamic. Such a change, if it arrives, would certainly affect rent and price appreciation rates.
As of December 30th, there were approximately 62,000 housing units of all kinds – luxury condos, rental apartments, market rate and affordable units, and social project housing – in the relatively near-term pipeline (next 1 to 6 years). Most are in the Market Street corridor area, the Van Ness corridor above Market Street, and in the districts to the southeast of Market Street (see map). If we add the mega-projects planned for Candlestick-Hunter’s Point, Treasure Island and Park Merced, which may take decades to become a reality, the number jumps to well over 80,000. As a point of context, there are approximately 382,000 residential units in San Francisco currently. About 3500 new units were added in 2014. (We are awaiting the city’s 2015 Housing Inventory Report for the 2015 figure, but it will probably be of similar scale.)
Housing supply and affordability issues, strong feelings about neighborhood gentrification and tenants’ rights, and even simple NIMBYism (or in SF, NBMVism, “not blocking my view!”) make development the most contentious political topic in San Francisco. Furious battles are ongoing in the Board of Supervisors, the Mayor’s office and the Planning Department; with neighborhood associations and special interest groups; and at the ballot box. Development is not for the faint of heart or shallow of pocket: One cannot contemplate building virtually anything in the city without vehement opposition and sometimes a well-funded coalition in opposition. For developers, the equation to be calculated out includes very high land and construction costs, increasing affordable-housing contributions required by the city, enormous hassle-factor and extended project timelines on one side, and the potential for financial returns on the other. In new San Francisco developments, condos often sell for $1250 per square foot and above, but we are hearing from people on the development side that they can no longer pencil out building new housing in the city in a way that makes financial sense. They believe that many of the projects in the pipeline probably will not actually be built, and thus the numbers quoted above are greatly overstated.
Of the units in the greater pipeline of 80,000 units, over 9000 units are designated as “affordable housing” – but many of those are in the long-term Candlestick-Hunter’s Point and Treasure Island projects. Because of the nature of the political environment, much to do with how much affordable housing will be built is in flux. Many developers are in intense negotiations with government agencies and neighborhood associations to find a workable compromise between return on investment on one hand, and unit mix and affordable housing requirements on the other. Said requirements may consist of a percentage of units in the project, building affordable units elsewhere in the city, or contributing substantial amounts to the city’s affordable housing fund in lieu of building.
In early March 2016, the San Francisco Board of Supervisors voted to put a city charter amendment on the June ballot, which, if passed, would hugely increase the affordable-housing contributions (in money or in affordable units built) required of developers of projects of 25+ units. Obviously, this would affect the financial equation for builders in the city. The question is will it affect their motivation to build so much as to significantly impact new home construction (market rate and affordable) in San Francisco. If you are interested, the city’s chief economist, Ted Egan, wrote a detailed report on the issue: Economic Impact Report
New housing construction is very sensitive to major economic, political and even environmental events (i.e. natural disasters), so simply because something is in the pipeline doesn’t mean it will be completed as planned within the time frame contemplated. First of all, plans are constantly being changed just in the normal course of things. And if a big financial or real estate market correction (or crash) occurs, as happened in late 2008, projects in process can come to a grinding halt, and new projects substantially altered, delayed or abandoned. Because the timeline in San Francisco can run 3 to 6+ years from initial filing with Planning to construction completion, developers and their lenders make enormous financial bets on what the future will look like. Timing is everything in real estate development, and can make the difference between large profits and bankruptcy. When the music stops – which it always does sooner or later, though the time range of opportunity can vary greatly – not everyone will find a chair to sit down in. That especially applies to those who over-leveraged their projects.
As a side note, big Chinese developers have been investing in both large residential and commercial real estate development projects in the Bay Area, and, according to reports, continue to aggressively seek additional opportunities. Though significant – constituting billions of dollars in investment – these projects do not constitute the greater part of Bay Area development.
Other reports you might find interesting can be found here:
These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate.