The San Francisco Rental Market and Why It Matters

For starters, the most recent US Census Bureau estimate (2014) concludes that about 57% of San Francisco’s population are renters.  That’s reason enough, especially when housing affordability is perhaps the major social and economic challenge that San Francisco faces over the long-term.

Rent and Condo Conversion Control.  With strength in numbers comes political power: San Francisco’s Rent Control ordinance applies to the vast majority of San Francisco’s housing stock, regulating everything from the rental increases that landlord’s can charge to existing tenants to how much interest owners have to pay renters on their security deposits.  Other ordinances have severely restricted the ability of owners to “remove” units from the rental market by converting them to condominiums.  Regardless of whether you think these controls are a good or bad idea, they have created an incredibly complicated legal landscape.  Whether you’re a tenant or an aspiring landlord, it pays to know your rights.  Here’s my favorite cheat sheet, courtesy of the Law Firm of Bornstein & Bornstein.

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Home Prices:  Chicken and Egg.  Furthermore, the correlation between the price of renting and owning is well-known, as this fascinating article from the Economist  shows. All things being equal, high rental rates tend to make buying – for those who can – a more attractive option.  When rents fall, home prices may fall too due to less demand.  Conversely, high home prices may swell renter demand while falling home prices may entice more renters into buying.  Of course, other factors are at play too:  rents and home prices will fall if employment drops, interest rates increase, wages fall, etc.  This is a complicated “chicken and egg” cycle – my guess is that while we can say there’s a correlation, it’s probably impossible to say which comes first.
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Heat Map of Changes since 2006-2008 Peak Values

Heat Map of San Francisco Median Home Price Changes

Percentage Changes since 2006-2008 Peak of Market
Range from 25% Below to 25% Above Previous Peak Values

August 2013 Market Report

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This heat map compares 2013 2nd quarter or 1st half median home sales prices – for houses, condos, co-ops and TICs combined – with those at the peak value time prior to the recent market recovery. Previous peak value times vary by neighborhood: typically, the least affluent neighborhoods hit peak prices in 2006 and also fell the most, percentage-wise, during the crash, falling 25% to 50%. These neighborhoods were most affected by the subprime and distressed-property sales crises. The mid-affluent neighborhoods peaked in 2007, and usually declined in value in the 20% to 25% range. And the most affluent areas reached peak values last, in the first half of 2008 prior to the September 2008 crash: Their fall in value ranged approximately 15% to 20% from 2008 peak to 2010-2011 nadir.

Generally speaking, when the market began to turn around in late 2011/early 2012, the last neighborhoods to fall were the first to recover, followed by the mid-affluent and then the less affluent areas. This link goes to our full report and an explanation of the analysis:
Heat Map Report

2All-Cash Home Sales
All-cash buyers come in three main categories: the first group consists of investors buying foreclosed-upon properties, often during trust-deed auctions on the “courthouse steps.” The Blackrock Group alone has purchased over 20,000 distressed homes across the country, which they usually fix up and rent out. Other investors buy, fix up and re-sell, or just buy, wait and flip (as the market recovers). The second category of all-cash buyers consists of people who always purchase their homes without financing: These often very affluent buyers have always been around to one extent or another. And the last category of all-cash buyers are those who prefer to finance their home purchases but have enough cash available to buy without financing: In the hope of winning in a competitive bidding situation, they make all-cash offers in order to appeal to sellers. This link goes to our full report:
All-Cash Buyers

3Homes With and Without Parking
The vast majority of San Francisco home sales include at least one on-site parking space in the sale, and 80% – 90% of buyers put parking on their must-have list when searching for a new home. That doesn’t mean that a home without parking cannot sell at a good price, but it does mean that on average it will take somewhat longer to sell, as well as selling at a lesser price than a comparable home with parking. It’s difficult to calculate the exact value differential between homes with and without on-site parking for a number of reasons. This link goes to our full report:
The Value of Parking

4Renting vs. Buying in San Francisco
We’ve updated two analyses regarding the financials of renting vs. buying in San Francisco. This is the first part of our calculations regarding 2-bedroom units, comparing the median condo sales price with the average apartment asking rent. (We also did one for 3-bedroom houses.) These calculations depend to a large degree on one’s financial assumptions and projections. For our complete analysis:
Rent vs. Buy – 2-Bedroom

5Largest SF Home Sales YTD
Looking at SF home sales reported to MLS by July 31, this chart shows the largest sales by neighborhood for properties selling for $3,500,000 or more. This link goes to our chart on sales below $3.5m:
Largest Home Sales, Chart 2

 
 
6Victorian & Edwardian Architecture in San Francisco
In case you missed our recent article using information and photos by SF architect James Dixon, here is a fascinating timeline and this link goes to the complete, well-illustrated article on the different Victorian and Edwardian architectural home styles prevalent in the city:
Victorian-Edwardian Architecture

 
 
7San Francisco Transportation Report
We recently stumbled across the annual report of the city’s Municipal Transportation Agency (MTA) and charted some of its most interesting facts. This chart illustrates the (staggering) number of citations issued by violation, and this link goes to all 5 of our charts:
SF MTA Report

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Bay Area Apartment Market Report – Paragon Commercial Brokerage

The San Francisco Bay Area Apartment Building Market

The Paragon Commercial Brokerage – Reis Reports
2nd Quarter 2013 Market Update

“Welcome to what is arguably one of the worst cities in America to be a renter, but among the best to be a landlord and apartment investor. San Francisco led the top-50 U.S. metropolitan areas in average rent growth during the second quarter, jumping 7.8% to $2498, while Oakland was No. 2 and San Jose was in fifth place. The rent increases have investors rushing to purchase existing properties.”

The Wall Street Journal, July 17, 2013, “Bay Area Rally Sends Rents Soaring”

The West Bay area of metro San Francisco (SF, Marin and San Mateo counties) continued to boom through 2012 and into 2013, even as it became increasingly expensive. The 136,980-unit market-rate investment grade San Francisco apartment market has rock bottom vacancy and high rents. While the pace of population growth is not high in the densely developed and expensive West Bay, it is still solidly positive at an estimated 9,770 in 2012 and a forecast 11,270 in 2013. Even higher increases are predicted for later years by Moody’s Economy.com. It seems people will pay any price to live in San Francisco, as long as a growing number of advanced, high paying jobs are available.

The East Bay apartment market (Alameda & Contra Costa Counties) also tightened further in early 2013, although rent gains remained more moderate.

The Bay Area has a long history of boom and bust dating back to the Gold Rush of 1849 and continuing through the dot-com bubble and bust little more than a decade ago. When the previous tech boom ended, not only did the number of jobs plunge but so did the population. Moody’s Economy.com does not expect a repeat. Instead, employment is forecast to keep growing at a somewhat slower pace, surpassing the 2000 employment peak some time in 2015. Reis predicts a leveling off of the current strong conditions in the apartment market, rather than a frenzy followed by a collapse. The well timed arrival of new supply will keep rent gains in check, while pent up demand will ensure the units are absorbed, barring an unexpected economic shock from outside the Bay Area.

The first three charts below pertain to San Francisco County alone and then only those listings and sales reported to MLS. The specific numbers should be considered approximate, but the trend lines apply to and illustrate the overall Bay Area market: low supply + high demand = higher prices.

1Supply
The supply of investment properties available to purchase as listed by SF MLS has dropped by over 50% over the past 3 years.

2Demand
While supply has plunged, demand has soared as measured by this statistic, percentage of listings accepting offers.

3Appreciation
The supply and demand dynamic, super-charged by improving economic conditions, rapidly rising rents and extremely low interest rates, has led to a rapidly appreciating market. This chart tracks average dollar per square foot values.

In the analyses below, the San Francisco Metro Area is comprised of San Francisco, San Mateo and Marin counties, while the Oakland-East Bay Metro Area consists of Alameda and Contra Costa counties. When mixing many buildings of very different size, quality and location, all the statistics should be considered very generalized and approximate. The county of San Francisco itself typically has significantly higher rents and values than the other counties.

SAN FRANCISCO METRO AREA RENTS & VACANCY

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OAKLAND-EAST BAY METRO AREA

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SALES ACTIVITY

In the West-Bay SF Metro Area, the Civic Center/Downtown submarket led the rest in units sold over the past four quarters at 1,370, and dollar value of sales at $266 million. Among submarkets with substantial sales price per unit, Marina/Pacific Heights leads in price per unit at $478,442. Generally speaking, as the market appreciates, Gross Rent Multiples are heading higher and Cap Rates lower.

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OAKLAND-EAST BAY METRO AREA

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NEW CONSTRUCTION

For the 3-county, west SF Metro Area, 2,300 apartment units are expected to complete construction in 2013, followed by 3,600 in 2014. The three years to follow are expected to see less new supply, but still more than 1,000 units completed in each year. Whatever number of apartments is built, however, Reis expects net absorption to match it as pent up demand is met. The only question is at what rent level.

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In Alameda and Contra Costa counties, apartment developers are re-starting projects shelved during the recession, and the under construction total has risen to about 1,760 market-rate units. There are also 1,226 subsidized and senior housing units under construction. Relatively few units, however, are expected to complete construction this year, allowing the vacancy rate to fall to a low point of 2.5% at year-end.

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SELECTED SUBMARKET SNAPSHOTS

The 15,771-unit Civic Center/Downtown submarket has a first quarter 2013 vacancy rate of 3.5% and an average asking rent of $1,604 per month, the lowest among eleven submarkets according to Reis. The 417-unit second phase of Trinity Plaza was projected to complete construction in summer 2013. The 750-unit Crescent Heights broke ground in January 2013 for completion in April 2014.

In the 9,787-unit Russian Hill/Embarcadero submarket, the vacancy rate is 2.5%, and the average asking rent is $2,767 per month, the highest in the West Bay area according to Reis.

In the 8,084-unit Marina/Pacific Heights submarket, the first quarter vacancy rate is reported by Reis at 2.0%, the lowest in San Francisco proper, with an average asking rent at $2,368 per month. “The Marina, the tract with the highest creative class concentration in San Francisco, has a reputation for being chock-full of young former fraternity members,” according to the Atlantic Cities. “As the San Francisco Chronicle notes, ‘Today the apartment buildings, shops, and restaurants seem to be bursting at their seams with beautiful, young and fit 20- and 30-somethings.”

The 16,018-unit South of Market (SoMa) submarket has a vacancy rate of 5.0%, highest among the submarkets, and an average asking rent of $2,517 per month, the second highest market-wide. In the close vicinity of both the financial district and the high-tech, bio-tech hubs in the city, this is a very strong market. This submarket has dominated new supply recently, but while 1,032 units remain under construction here, new supply is spreading to other areas.

The 8,381-unit North Marin submarket has a vacancy rate of just 1.5%, the lowest among the submarkets, and an average asking rent of $1,608 per month, the second lowest according to Reis.

In the 14,713-unit Central San Mateo submarket, the first quarter vacancy rate is reported by Reis at 2.9%, with the average asking rent given at $2,006 per month, highest in the suburbs.

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Overheated? Yes. Bubble? No. Stabilizing? Maybe.

July 2013 San Francisco Market Report

If you prefer, you can skip the following analysis to go straight to the charts and maps following.

Many adjectives are used to describe San Francisco, but normal isn’t a common one – and the same can be said about our real estate market. Even taking into account its tendency to be unusual in one way or another, this past spring’s market was overheated by virtually any definition. Surging consumer confidence and huge buyer demand chased a deeply inadequate supply of homes for sale, abetted by interest rates so low that loans – factoring in inflation and mortgage interest deduction – were almost like free money. All this led to an extreme seller’s market, a feeding frenzy and dramatic price appreciation.

But not, in our opinion, a bubble. The Economist, one of the first to sound the alarm for the last bubble, sees no sign of a U.S. housing bubble, basing its conclusion upon historical comparisons of home prices with rents and incomes. Also, it is not unusual for the market to go somewhat crazy following a 4-5 year down cycle after all the repressed demand bursts forth – this happened in 1996-1997 too. Besides which, we are only about 18 months into the current recovery. Though real estate is susceptible to sudden economic and political shocks, in past cycles, recoveries have typically lasted at least 6-8 years before peaking. That doesn’t mean there won’t be any short-term market adjustments, up or down, for one reason or another, along the way.

There are some signs of a normalizing market. After a year of declines, the number of new listings in the 2nd quarter was a little higher than the 2nd quarter of 2012. Though this inventory was quickly gobbled up and overall supply remains very low, it’s a good sign more sellers are entering the market. Median prices may be leveling off after spring’s big pop – it’s still too soon to be sure, but summer often sees a cooling down. It’s not welcome news to buyers, but interest rates have increased from extreme lows – though remaining very low by any historical scale. (See below: The Sky is Not Falling.) The distressed home segment, which always distorts markets, is disappearing in the city and declining everywhere. And new-home construction continues to increase: even though we won’t see much of this new inventory until 2014 and later, it’s a very positive sign.

We have updated our home value maps to reflect spring’s recent sales:
San Francisco Neighborhood Values

1San Francisco Median Home Prices
For both houses and condos, the second quarter saw jumps well above previous peak values. Median sales prices are affected by other factors besides changes in value – seasonality, inventory, buyer profile, big changes in the distressed and luxury home segments – but the dramatic increases do reflect rapidly climbing home values in the city. Though all SF neighborhoods have been experiencing striking appreciation, this does not mean that all have now exceeded previous peak values.

2Sales Over & Under Asking Price
This chart illustrates the enormous percentage of listings selling for over – and sometimes far over – asking price. 25% of house sales in June sold for 20% or more above list price: At San Francisco prices, 20% above asking often equals hundreds of thousands of dollars.

Price reductions: 89% of second quarter sales sold quickly without price reductions at an overall average of 8% over list price – a clear indication of overheating. Still, not every listing sold without a price reduction and some didn’t sell at all, but ended up withdrawn from the market:
Price Reduction Chart

3San Francisco Luxury Home Sales
No market segment has been affected more dramatically by the recovery than luxury homes. In an inventory constrained environment, it has far out-performed the general market in unit sales.

This link goes to our luxury market report that also delineates the neighborhoods which dominate high-end house and condo sales in San Francisco:
Paragon Luxury Report

4Interest Rates: The Sky Is Not Falling
Not to diminish legitimate concerns regarding rising mortgage rates and their effects on housing costs, but this graph puts recent increases in context. At any time before 2011, the current interest rates, even after their recent big percentage jump, would be reason for conga lines of celebration in the streets. Rates had to rise from their historic and artificial lows – how far and fast this may continue is unknown to us, but we don’t presently expect big shocks to the real estate market in the near future.

Distressed Home Sales: this link goes to a chart illustrating the rapidly dwindling distressed home market in San Francisco. In most neighborhoods, the effect of these sales has disappeared altogether.
Distressed Home Sales

5Months Supply of Inventory (MSI)
Even with the increase in new listings in the second quarter, inventory as compared to demand remains drastically low.

Average Days on Market (DOM) have also hit historic lows for virtually every property type in the city:
Average Days on Market

7-13_Map-Unit_SalesWhat Sells Where
What district of San Francisco has more house sales than any other? Which area has far more condo sales? You may be surprised at the answers.

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The Economist on Bubbles — Neat Interactive Chart Feature

The Economist has a good article (about the US real estate market not being in a bubble) and created a terrific interactive graph that allows you, by metro area (you have to click on San Francisco to add it to the graph), to compare home price changes in real terms over time, versus average incomes, and versus rents, from 1987 to 2013. San Francisco is at the top of the chart in percentage increase and increases in prices in real terms, but still rates right at the long-term average in home prices versus income and versus rents. The Economist was one of the very first to identify the housing bubble inflating – running strongly against the then current opinion of other pundits – so I think their opinion on whether another bubble is about to burst in the U.S. is worth hearing. (FYI: The do believe there are serious housing bubbles in certain other countries.)

”The verdict: in most markets houses are near or above their long-run values, but none looks bubbly. Price rises in Phoenix, Tampa and Miami have restored values only to their long-run averages. In Las Vegas they are still below that long-run average. Many things could trip up the housing recovery, from stalling job growth to higher mortgage rates; at the moment, a bursting bubble is not one of them.”

You can play around with the interactive chart, and you should read the article below the chart widget:

http://www.economist.com/node/21578927

Here are 3 of their charts with San Francisco added:

Home Price Appreciation in Real Terms (Adjusting for Inflation):

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Home Prices Against Average Income:

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Home Prices versus Rents:

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The Crunch in San Francisco’s Real Estate Market

Over the last 13 months, for a variety of compelling economic reasons, home-buyer demand in San Francisco has continued to grow ever stronger, while the inventory of homes available to purchase has only become tighter. This is the classic supply and demand dynamic — increased competition for a scarce commodity — that leads to increasing prices. Our inventory crunch, at least so far in 2013, is not easing. This situation is advantageous to sellers, and difficult and aggravating for buyers (and their agents): the time, effort, emotional energy and money that it takes to find and buy a home have all been increasing.

However, if buyers can summon the patience and endurance to see the process through, they might take some solace in the last 2 real estate recoveries, in the eighties and nineties. As can be seen on charts further down, it’s not unusual for repressed buyer demand to explode after a long down market, creating the same rapid appreciation situation we are experiencing now. But even with increasing competition and rising prices, those who purchased in the first few years of the past 2 turnarounds ended up doing very well with their investments. We don’t know if this recovery will continue to follow the same trend lines as past market cycles, but it has thus far.

Below are analyses that look at both short-term and long-term trends from a variety of angles.

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Is Everything Selling Over the Asking Price?
No, of course not: not all listings are selling for over list price. Some homes still go through price reductions and some don’t sell at all, but it is true that a large percentage of SF listings is now selling for over asking price and sometimes far over. This is especially the case with houses, where 1 in 4 sold in the past 2 months went 10% or more over the list price. (Note: Homes selling for within a quarter percent of the list price were considered to have sold AT asking price.) And this link shows the dramatic increase in median home prices in 2012:
Median House & Condo Prices

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New Listings vs. Accepted Offers
There are two issues behind the current low inventory crunch: firstly, there’s the simple matter of fewer listings coming on market, and secondly, that the listings that do arrive are being snatched up very quickly. This chart compares the influx of inventory and buyer demand in January of the last 4 years. Currently, on any given day, the choice of listings available to purchase is far below that of previous years — which fuels fierce competition between buyers. This link illustrates that fact and the overall decline in listings for sale:
Listings for Sale

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Ratio of Expired Listings to Sold Listings
Even in a hot market, not every listing sells: some listings viewed as overpriced end up expiring or being withdrawn. However, the ratio of expired and withdrawn listings to sales declines significantly in a strong market, which is what happened last year. Typically, the fourth quarter is marked by a very high rate of expired and withdrawn listings due to the holiday season and end of the year, but in the last quarter of 2012, buyers continued to aggressively snap up listings. And this link goes to a days-on-market chart illustrating the increasing speed with which buyers are snapping up listings:
Average Days on Market

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Perspective on 3 Recoveries
This Case-Shiller chart for the 5-county SF Metro Area begins with the recovery following the market recession/ doldrums of 1991 – 1995. The market of 1996 and 1997 had basically the same dynamic of repressed demand exploding alongside a recovering economy that we’re experiencing today. (All chart numbers reflect a percentage of the home values in January 2000.) There followed a 100% increase in values over the next 5 years, even before the inflation of the big bubble of 2004-2008. Buyers who bought in the mid-late nineties ended up doing quite well. This link shows the same dynamic in the transition from the late seventies/ early eighties recession to the mid-eighties rebound. Those buying in the early years of that recovery also did pretty well, even factoring in the following recession and market correction:
Market Recovery in the 1980′s

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Supply & Demand
The chart and the one in the following link are two classic measures of supply and demand. The lower the months supply of inventory and the higher the percentage of listings accepting offers, the stronger the demand when compared to the supply of homes available to purchase.
Percentage of Listings Accepting Offers

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Buying vs. Renting in San Francisco
This analysis (just 1 part of a full report) compares buying a 2-bedroom SF home at the current median price of $775,000 to renting a 2-BR at the current average asking rent of $3800. It illustrates how buying can make excellent financial sense after tax benefits and principal pay-down are factored in, much less building substantial home equity over time. In this analysis, the “net” house payment comes out well below the rent. However, these scenarios depend on many assumptions such as interest, appreciation, inflation and income-tax rates. It depends on the rent one is paying and having the 20% down payment and closing cost monies available. Still, there’s no doubt that with current interest rates and rents, the equation is much more favorable to buying than it has been for a very long time. Feel free to perform your own analyses using our Rent vs. Buy calculator, which can be accessed using this link. After putting in your numbers, be sure to click on Calculate and View Report:
Calculators

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