Home prices and rents aren’t a joking matter in San Francisco. Buyers are grappling with the concept that the median house costs $1.3 million and the median condo $1.1 million, 65% more than at the peak of the prior bubble that then imploded. It has more than doubled since January 2012. New condos often go for $1,250 or more per square foot.
In order to make a 20% down payment on the median condo, buyers need to have $220,000 saved up, or borrow it from mom and dad. Renters face $3,500 a month for a new 500-square-foot studio apartment, with parking extra….
A condition called the “San Francisco housing crisis.”
It’s not a crisis for anyone speculating in real estate, for brokers, lenders, and all the other folks making money on it, including the city of San Francisco. It’s not a crisis for owners that bought years ago and are now sitting on huge gains. And it’s not a crisis for people in rent-controlled apartments until they get evicted, or until they need a different place to live because the family is getting bigger, and suddenly they find out that they can’t afford anything in the city at all.
Which raises the hot topic of “affordable housing,” a topic of endless political battles that made it on the last ballot. “Affordable housing” is always subsidized by someone, either by taxpayers, including federal taxpayers, by the next generation in San Francisco that has to deal with the “affordable housing” bonds, and/or by renters and buyers of other units. When developers are pressured to include “affordable” units or pay into San Francisco’s affordable housing fund, they’ll add these costs to the costs of other units. The more “affordable” units there are, the more expensive housing gets for everyone else. That’s the bitter irony.
But there has been a dynamic underway that is changing the equation in big way:
Build, Baby, Build!
One of San Francisco’s “biggest new-housing construction booms in history,” Paragon Real estate called it in its report. It’s accompanied by one of the biggest office construction booms in history. Developers are making hay while the sun shines. Banks are lending to developers like there’s no tomorrow. Money comes from all over the world, particularly China. Paragon Chief Market Analyst Patrick Carlisle:
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.
The money that washes over San Francisco tsunami-like from time to time creates phenomenal booms, and when it recedes, as it always does, it leaves behind terrifying busts. Now is the boom. Though big cracks have already appeared at the luxury end, with soaring listings and plunging sales. But hey, party on.
“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,” Paragon said.
About 59,000 housing units are under construction or in the planning stages, based on the SF Planning Department’s new Q3 report. They’ll come on the market over the next five to six years to increase the city’s housing stock of 382,000 units by over 15%. About 3,500 units already came on the market in 2014. This year, even more units are coming on the market. In 2016, the floodgates will open. And mostly expensive units.
But that’s just the near-ish term. There are three additional mega-construction projects in the pipeline that will take a little longer: Park Merced (5,700 units), Hunters Point which includes the contaminated Navy shipyards (10,300 units), and Treasure Island, also a former Navy site with radioactive contamination, a scandal I wrote about in 2012 (7,800 units). With these projects, the housing supply in the pipeline jumps to over 82,000 units.
Homes in San Francisco are occupied on average by 2.2 people. At this ratio, the new supply would create housing for 180,000 people, in a city with a population of 852,000!
A 21% jump in population, in just a few years!
That’s how insane the math it. Or as Paragon put it, this is the time for developers and 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.” But it isn’t easy:
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.
The breath-taking views in a hilly city surrounded by water on three sides can add a lot of value to the unit. So taking away someone’s view is like confiscating property – and entails that sort of reaction.
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 penciled out includes high costs, enormous hassle-factor, and extended project timelines on one side, and the potential for large financial returns on the other.
It works until suddenly it doesn’t:
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.
This historic onslaught of new housing units coincides with the receding tsunami of money: the crazy valuations of the startup boom driving much of San Francisco’s boom-and-bust economy are already running into trouble, which is how a startup bust begins. And that sort of thing, ironically, will eventually make housing a lot more affordable, even as lenders and investors are licking their wounds, unless the Fed steps in once again with some miracle cure to muck up the workings of the market.
The bottom is already falling out of luxury real estate in San Francisco, particularly in condos. Read… San Francisco’s Luxury Condo Bubble Turns into Condo Glut
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.