What Experts expect San Francisco’s Housing Market to Look Like this Year
According to builders and analysts, San Francisco’s market-rate housing development will come to a halt this year as several new buildings open up and falling rent and condo prices combine to turn off the flow of capital into the city’s real estate markets.
As reported in The San Francisco Chronicle, over 4,000 new units will be available this year, including luxury condos such as the Four Seasons Private Residences on Mission Street and One Steuart Lane on the Embarcadero. These totals are certainly above historic production numbers.
However, new developments like neighborhood infill apartments and larger multiphase projects may be delayed until next year or 2023, which could lead to rent and pricing increases as the economy recovers.
Right now, 18,000 units that are ready to go have not broken ground, per an analysis by the online real estate publication Socketsite. That is 31% higher than 2020 and the highest number in a decade.
Eric Tao, a principal with L37 Partners, is realistic about the challenges facing builders nine months into the pandemic.
His company is building 232 condos and a 242-room Lines Hotel at 950 Market St. slated to be completed next summer. When speaking with investors, he lets them know rents are down 20%, that the hotel market is abysmal, office buildings are at 13% capacity and everything that led people to downtown San Francisco is still shut down.
With vaccines being distributed and a possible improvement of the situation by this July, that is encouraging news for when the condos at 950 Market St. are available and when the hotel will open in 2022.
“San Francisco is still a ghost town,” he said. “The only silver lining is that we are still constructing, we are not done. If we were open right now we would be underwater.”
While L37 Partners has two apartment projects with 500 units that have not yet started construction in the South of Market neighborhood, Tao doesn’t expect investment funds to be available before 2022.
“I’m a conduit for large capital investment and can only deploy capital to build housing when the math is right,” he said. “Right now the math isn’t right.”
The highest it has been in 15 years, the condo inventory in San Francisco has brought down resale prices by 10% since the pandemic hit while single family homes in the Bay Area are up 19% year over year.
Ken Rosen, chairman of the Berkeley Haas Fisher Center for Real Estate and Urban Economics, said he believes that 90% of Bay Area jobs will come back in a year but that more flexibility will give workers the opportunity to live further from the office.
High taxes, bureaucratic delays and quality of life issues that include drug dealing, homeless camps and crime rates are less motivation for companies to return to the downtown or high tech neighborhoods like Mid-Market, slowing down the recovery, he said.
“My capital markets friends from New York and Chicago are asking, ‘Is San Francisco over? Is California over?’” he said. “I don’t think the city and state leaders realize the crisis they are going to have. The San Francisco Board of Supervisors is not going to have any money to spend if it drives business out. We had the boom, but the boom is over.”
Christopher Brandt, Senior Vice President of Asset Management, Paramount Group, Inc. said that pricing has not been cut at One Steuart Lane and that the building will open over the summer.
“Sales are going extremely strong and we have been seeing consistent demand,” he said. “We see this as a once in a generation opportunity.”
For a region that has been dealing with an affordability crisis, the downturn in market rate development could be a bit helpful as the slowdown could lead to a decrease in land values and construction costs, a benefit for builders of subsidized affordable complexes.
The Mayor’s Office of Housing and Community Development, for instance, plans on beginning work on 1,345 affordable units over the next two years in 12 different projects.
Related California, which builds market-rate and affordable buildings, has partnered with nonprofit organizations on three of those projects.
Mayor London Breed proposed deferring fees so builders can start work and has pushed a charter amendment that would allow “as of right” development for projects that have more than the required level of affordable units.
“The early fallout from this pandemic recession is already preventing new housing projects from moving forward,” said Breed. “We can’t just stand by and let that happen. Our recovery is going to rely on the jobs that these construction projects bring, and we will need the new homes opening in the coming years so we don’t fall back into the trap of seeing huge rent increases once our economy recovers.”
Mark MacDonald, principal of DM Development, which is planning to build a dozen San Francisco projects, said he is working on convincing investors that now is the time to feed funds into San Francisco housing. In 2010 and 2011, after the recession, McDonald bought numerous Hayes Valley development sites, which all turned major profits.
“When you look back, 2010 and 2011 was the best time to be making new investments,” he said. “It didn’t feel like it at the time, but all those investments turned into gold.”
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