The Sheridan Report
By Matthew C. Sheridan
Everyone seems to be waiting these days. The much-heralded
economic boost that many believed would result from
the resolution of America's war with Iraq, has not yet
materialized. On a national level, corporations are
still waiting to emerge from the economic doldrums and
are not reinvesting in growth. Stock market investors,
likewise, are waiting on the sidelines, looking for
clear signs of good earnings reports before investing
again.
On local and statewide levels, government employees and politicians are waiting for the fallout from pending layoffs caused by massive budget deficits. Tenants, meanwhile, are waiting for landlords to lower rents even more, and landlords are waiting for the next big thing to propel the economy forward. Investors — having stayed out of the over-inflated apartment market — are waiting for the chance to jump back in, waiting for the rising of interest rates that will force some owners to sell.
Unemployment
If regional unemployment numbers are any indication of a recovery, it appears those anticipating an uptick in our local economy may have a longer wait. A recent switch by California'sEmploymentDevelopment Department in the methodology used to determine state employment numbers revealed unemployment numbers to be much worse than previously reported. The system, called the North American Industry Classification System (NAICS), revealed a serious unemployment undercount by the state. In San Francisco, this methodology shows an amended unemployment rate of 7.3 percent for 2002, instead of the originally reported 6.8 percent. The numbers for Santa Clara county have an even greater discrepancy, with NAICS system reporting an 8.4 percent instead of the previously reported 7.5 percent unemployment rate for 2002. According to John Crapo, Executive Director of the San Francisco Center for Economic Development, "The unemployment numbers confirm what many had suspected—a serious undercount in job losses in the region." The last few months, however, show a sight decline in unemployment in both counties.
Asking Rents
| Asking Rents First Quarter 2003 |
Studios: |
$1,051 $1,533 $2,096 $2,585 $3,459 $1,792 |
Despite the poor economic and job-loss numbers, asking rents have leveled off over the last year in San Francisco. In fact, according to MetroRent, asking rents actually increased slightly during the first quarter of 2003, after dropping 25 percent from their high. Nonetheless, rents are expected by many to continue downward another 5 - 10 percent.
Vacancy Rate
For years, the media reported San Francisco's vacancy rates stood at 1 percent. Where that number came from, no one would tell—it was always just the lore of the city's real estate circles. These days, tracking San Francisco's residential vacancy rate remains elusive. National real estate firms are showing a vacancy factor of a little over 4 percent for residential vacancies. This number, however, probably reflects a rate based upon large-size apartment buildings only—not necessarily a good reflection of our rental market as a whole. When contacted recently, several local property management firms reported a vacancy rate of 7 - 8 percent.
Migration
It has been obvious to most that with such high unemployment in the region, some residents have left the city. While migration patterns are historically hard to track, 8 U-Haul Corporation showing where people are relocating. Sacramento tops the list of destination sites for the last two years—a town where rents are low, the threat from terrorism is minimal, and purchasing a home is still within reach for many people . Sacramento's housing affordability index (the percentage of households that can afford a median-priced home) stands at 43, much better than San Francisco's, which is 15, the lowest in the state.
Top Cities People Moved to From San Francisco
- Sacramento
- Los Angeles
- San Diego
- Santa Monica
- Santa Rosa
- Concord
- San Jose
- Van Nuys
- Las Vegas
- Auburn
Home Appreciation
A source of security for many, home ownership still yields a strong return on investment. With interest rates near all-time lows, many homeowners have been on a refinancing binge as of late, taking their equity out, and, in turn, helping prop up an ailing economy with their spending. Locally, according to the Office of Federal Housing Enterprise Oversight, home appreciation continues to be strong in San Francisco. Twice in the last five quarters, however, appreciation has been either negative or near zero—numbers not seen since early 1996—the end of the last housing slump for the city.
| Appreciation |
Last Quarter (Q4 '02) |
1 Year |
5 Years |
Home Prices
San Francisco median home prices remain strong, though over the last few months they have gradually declined. Meanwhile, prices for the Bay Area as whole continue to gradually climb. The median home price for March 2003 was $530,000 for San Francisco and $419,000 for the Bay Area respectively. The impact of the war on Iraq may have kept sellers from entering the market recently. According to Paul Christen, a real estate agent with Coldwell Banker, there were signs that inventory was reduced over the last few months. Now, however there appears to a be revitalization in the market, with people who sat on the sidelines snatching up real estate, said Mr. Christen. He believes the market shows signs of stability, with multiple offers still coming in, but not for every home.
Apartment Building Sales
Despite increased operating expenses and decreasing
rents, apartment-building prices continue to be solid.
After taking a beating in the last quarter of 2001,
prices-per-unit soared to highs in the second and third
quarters of 2002, before recently retreating slightly.
"The driving force behind these numbers are ridiculously
low interest rates," says Phil Boersma, a real
estate broker with Arroyo & Coates. Without a hike in
interest rates in the near future, prices are not likely
to fall any time soon. When that moment comes, however,
some owners may be caught with a rising adjustable rate
loan and will be stretched very thin, which could lead
them to let go of their buildngs. According to Boersma,
"That's when seasoned investors swoop in and take
advantage of the situation."
We're all waiting for the other shoe to drop. Are we in for a double dip recession? The Commerce Department recently reported the Real Gross Domestic Product for the country rose an anemic 1.6 percent for the first quarter of 2003, just slightly higher than fourth quarter of 2002. It may be a long summer.
Sources
Unemployment: The California
Employment Development Department, Labor Market Development.
Bay Area data is not seasonally adjusted. Numbers based
on county figures.
Consumer Price Index: U.S.
Department of Labor, Bureau of Labor Statistics.
Data is not seasonally adjusted. Region includes San
Francisco, Oakland, and San Jose areas. Shelter is defined
as rent of primary residence, homeowners’ equivalent
of rent, and shelter away from home. Numbers represent
percentage increases over previous period.
Asking Rents: MetroRent.
Graph represents the average asking rents for all unit
types.
Migration: U-Haul
Corporation. Includes counties of Marin and San
Mateo. Data generated between Memorial Day and Labor
Day 2002.
Home Appreciation: Office
of Federal Housing Enterprise. The Home Price Index
measures the average price changes in repeat sales or
refinancing of the same single-family properties involving
conforming, conventional mortgages purchased or securitized
by Fannie Mae or Freddie Mac.
Median Home Sales: DataQuick.
Median home price includes all single-dwelling homes
and condominiums, new and resale.
Apartment Building Sales: Phillip J. Boersma with
Arroyo &
Coates.
The Sheridan Report does not make any guarantee, warranty, or representation as to the completeness or accuracy of the information contained herein. Matthew C. Sheridan is the editor of the San Francisco Apartment Magazine and the PPMA News. Copyright © 2003 Sheridan & Associates