Feature
by Jim Forbes
Most people would agree that San Francisco’s real estate market has been directly affected—in recent years, propelled—by the stock market, and more specifically the high tech companies that have been sprouting like mushrooms in Silicon Valley and South of the Slot. Incredible wealth created seemingly from nothing was turned into cash after restrictions elapsed or options vested, putting upward pressure on real estate prices, both for sale and for rent, like no one had ever seen before. Even with the recent collapse in stock prices, the damage (if one can call it that) has already been done since the equity and venture capital funds that were withdrawn at the crest of the roller coaster have been safely stashed away in real estate, just at new levels.
As in the stock market, historical perception comes into play in the real estate arena. In San Francisco there is a firmly held belief that real estate prices do not go down, even in a recession. The worst that happens is that prices stay flat, and flat is plenty rewarding when, for example, the initial investment came from cashing out on a few thousand shares at $90 each, when that same stock is now selling for $3 per share. For a shocking summary of the bloodbath one should visit the web at, http://www.vtoreport.com/other/wasteland.htm (yes, it still works). And $3 is a number that still seems dubious.
Moreover, there is an enduring perception that despite well-publicized tales of trouble in fantasyland, this is still where the jobs are, even if those jobs don’t pay quite as much as they used to. Therefore, demand—especially at the entry level—remains strong in spite of the slowdown, because things are worse elsewhere. The perception that the NASDAQ stocks have been the locomotive driving this train of prosperity has not changed; the train has just slowed down. Even so, it’s faster than walking, so people keep coming, and as a result our rents have stayed high.
Based on a survey of two-bedroom rents as advertised in the San Francisco Chronicle on December 3, rents in the City for the month of December backed off a mere 4% from September’s all-time high. Rents are still up 28% for the year; the latest median asking price for a two-bedroom apartment in the City is $2,875.
Supply is increasing, however. The number of classified ads for apartments on December 3 exceeded September’s figure by 50%, and was double the July figure. Whether the demise of the Examiner’s joint operating agreement with the Chronicle had anything to do with this upswing is difficult to tell. If anything, one might have predicted fewer such ads in the new Chronicle, since classified ads previously reached readers of two distinct papers.
Unless San Francisco landlords are becoming averse to Internet advertising (like everyone else, it seems), one would think Craig’s List, RentTech, Metro-Rent and other web-based resources would be replacing traditional newspaper classifieds, and the number of ads appearing in the Chronicle would be down, not up—even in a rental slowdown. Perhaps the supply is even greater than the survey suggests. If so, it should become apparent in the coming months. But it should also have had a greater impact on the median rent. Instead, that number is basically flat.
A less scientific approach to monitoring the local market—but one I have often felt is an accurate bellwether—is the rental activity in my own building at Post and Leavenworth. With 113 studios and one-bedrooms located at the economic midpoint of the city, our fortunes can be very indicative of the broader market. And indeed, over the last couple months, calls to our rental office have dropped from ten per hour to one per hour, and our studio rent, which peaked in November at $1,295, has fallen to $1,195, September’s figure.
Oddly, our sampling of San Jose rents reflected no slowdown in demand in that city. The median rent for a two-bedroom apartment in San Jose surged to $1,750 per month, a jump of 28% since September and 63% since the beginning of the year, leaving San Francisco’s success in the dust.
At first glance, these figures seemed so astounding that I questioned their creditability. But when I took an historical overview I concluded that what is happening in San Jose is probably a delayed correction. That is, San Francisco may have actually been ahead of the economic curve and San Jose slightly behind it. In any case, the percentage increases since 1990 have San Jose behind, 195% to 158%. Since the beginning of the high tech-led recovery of 1995, the gap closes to 261% to 245%, with San Francisco still leading the way.
Since the vast majority of the high paying jobs have been in Silicon Valley, one would expect San Jose’s numbers to be greater, so a virtual tie seems not out of the question. Changes in home prices support this. Using data supplied by the California Board of Realtors, the median price of a single-family home in Santa Clara County has jumped 67% for the year 2000—just slightly more than San Jose rents—and 163% since 1990 (which is within 5% of the median countrywide rent increase). San Francisco’s numbers are equally close. Since 1990, single-family home prices have climbed 186% and rents have jumped 195%.
So the question remains: with the Silicon Valley-led NASDAQ off
40% for the year, will rents and home prices in San Francisco experience
a commensurate drop, or is the current situation merely a slowdown,
in which case real estate in the City will simply flatten out? What
happens in the next few months could be very telling, but something
tells me flat is as bad as it will get.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Jim Forbes is president of Urban Properties, a real estate investment and brokerage firm. He can be reached at 415-922-8998 or at his Web site at propnews.com. © Copyright 2001