The Sheridan Report

It’s Crazy Right Now

By Matthew C. Sheridan

During the past few months, the national economy has appeared to be on the mend, with a slew of positive numbers coming from several economic indicators. By the end of 2003, the economy showed real gains, with growth at a welcomed rate of 4 percent (GDP), a renewed surge in the stock market, a drop in the unemployment rate and a sustained rise in factory orders. Yet uncertainty in the economy continues. Weak payroll gains for January worried many economists who were expecting a stronger job market.

The Labor Department reported the U.S. only added 112,000 new jobs in January; many analysts expected much stronger job growth in the range of 300,000 new jobs per month. With only 366,000 new jobs created over the last five months, concern about a jobless recovery continues to persist. Outsourcing is also a major concern, as companies continue to ship jobs overseas. For the 42nd month in a row, manufacturing jobs decreased in America.

Jobs, Jobs and no Jobs
Locally, the story also remains clouded. Job creation in San Francisco remains fairly stagnant, with gains of roughly 400 per month over the past half-year. A positive sign is that some companies are setting up shop here or even returning again to the city. According to Todd Ewing, Managing Director of the San Francisco Center for Economic Development at the Chamber of Commerce, San Francisco is showing signs of thawing economically. “It will be a moderated climb, but nothing like our previous employment levels,” said Ewing. He cautions that the recent drop in the unemployment level here is more a reflection of an exodus of job seekers from San Francisco—not an actual increase in jobs. With a new city administration in place, there is a renewed proactive recruitment of businesses to San Francisco by local government and business groups. “Gone are the days when the city sat back and let them (companies) come to us,” said Ewing.

Outsourcing
The Bay Area could be greatly impacted by the continued loss of jobs overseas due to outsourcing, as reported in a recent research paper by the Fisher Center for Real Estate & Urban Economics at UC Berkeley. Authors Ashok D. Bardham and Cynthia Kroll warned that, “High-tech markets such as San Jose and San Francisco are particularly at risk of services outsourcing over the next decade.” High salary levels, coupled with a large percentage of jobs in the computer and math fields, make these regional hubs of employment vulnerable to ongoing outsourcing.

Vacancy Rates
Despite a renewed focus on economic development, several real estate indicators point to a continuing weak economy here. San Francisco’s residential rental vacancy rate reached a historic high last year at 7.9 percent. Tracked by the U.S. Census Bureau, the city’s rental vacancy rate has climbed so high that it eclipsed the prior record of 5.8 percent set in 1993. For the fourth quarter of 2003, the rate stood at 8.2 percent, down slightly from the third quarter’s 9.2 percent rate. Robert Link, a real estate agent with S & L Realty, believes the rental market is still quite soft. “Last year in January, we rented 14 apartments; now a year later, after the leases expired, two-thirds of those units have given notice,” commented Link. With a vacancy rate of 5 percent for the units he manages, Link chalks up some of the turnover to seasonality factors. He sees an influx of students every January but not many newly employed San Franciscans. He adds that tenants are apparently still trading up, and “A lot of people are playing musical chairs, trying to get more, for less. Who can blame them?”

Asking Rents
While tenants continue to demand lower rents, asking rents experienced a minute bump in the fourth quarter of 2003. The current average asking rent for all unit sizes combined, stands at $1,769, compared to the tenant-demand amount of $1,712. This represents a 3 percent differential for the fourth quarter, compared to 2 percent over the two previous quarters. The following is the breakdown by unit size for asking rents in the fourth quarter of 2003:

Studios:	$1,029
1 Bedrooms:	$1,524
2 Bedrooms:	$1,986
3 Bedrooms:	$2,528
All Units:	$1,769

CPI & Help Wanted Index
Other economic bellwethers for San Francisco and the Bay Area continue to show weakness in the local economy. The Consumer Price Index for “all consumer items” and “shelter” (defined as rent of a primary residence) for the San Francisco MSA shows anemic increases for 2003 for both categories, increasing only 1 percent for the latter—the smallest increase in over 10 years. The Help Wanted Index for San Francisco, while showing recent signs of stabilization, continues to hover at all-time lows and is currently at 21 (1987 = 100).

Home & Condo Sales
“It’s crazy right now,” said a realtor friend recently, summing up the current real estate market in San Francisco and the Bay Area. Despite the weak economic conditions here, there continues to be a strong demand for the purchase of real property. Sale prices for single-family homes and condominiums in San Francisco have been gently bouncing up and down since Spring 2002, with the median price for 2003 holding at $554,500. Meanwhile, Bay Area home and condo median sale prices have surged 21 percent from two years ago. For the month of December 2003, home prices stood at $458,000 up from $377,000 just two years ago.

According to an article by Joseph Hurd in the UCLA Anderson Forecast, the Bay Area lost over 337,000 jobs or a 9.4 percent drop in employment between 2001 and 2003. Hurd maintains that the sustained demand for housing is a result of the ongoing Bay-Area-wide housing shortage, but he predicts a lowering of housing prices due to a rapidly dropping population throughout the Bay Area. These numbers are reflected in a recent report issued by the the State’s Department of Finance, that showed five of the eight Bay Area counties lost population last year. The report showed a net migration loss, when factoring in birth and death rates, of 11,000 for Santa Clara county and 3,000 for San Francisco.

2-4-Unit Buildings
Meanwhile, 2-4-unit apartment buildings—the sector of housing everyone likes to beat up on—shows a continuing resilience, fetching strong sale prices. Comprising 25 percent of the San Francisco housing stock, 2-4-unit buildings remain one of the few methods of purchasing a home. They also continue to serve as an excellent source of investment. With San Francisco’s contorted housing laws, this building type—formerly exempted from rent control, if owner-occupied—no longer makes sense as rental property. Thanks to Byzantine condo-conversion laws, rent control and extremely low allowable rent increases, 2-4s represent the ultimate failure of San Francisco’s housing policies. Despite imposing law after law restricting housing development and home-buying opportunities, the politicians of San Francisco have shot themselves in the foot on this one.

In their zeal to preserve “rental housing,” policymakers and tenant activists have driven home buyers underground, forcing them to employ a whatever-means-necessary approach when trying to find a home. At the time of their construction, 2-4-unit buildings were designed for large, extended families. Now 100 years later, these same buildings are targeted for tenancy-in-common partnerships (appropriately so) and once again—surprise, surprise—for extended families.

A byproduct of the system these days, however, are the buyers who simply “flip” these properties, converting them to condominiums and quickly realizing a gain when sold to the hungry public. Meanwhile, the city fails to collect conversion fees on TICs, fails to control rental loss and, all the while, drives up the price of housing. It should be noted that from 1991-2000, the City allowed 2,808 housing units to be converted to condominiums or just over 1 percent of San Francisco’s rental housing stock. Meanwhile, during the same period, 10,369 housing units were created, of which 3,034 where affordable.

According to Frank Bodnar, a real estate agent with Prudential California Realty, the numbers just don’t pencil out for 2-4-unit buildings as rental housing. “Thanks to the Supervisors’ onslaught on property rights, small-time investors have been scared away.” He adds that, “With a Republican governor now, it will become more difficult to chip away at property rights—it’s the only saving grace for San Francisco.”

Many San Franciscans, in the recent economic downturn, rejoiced over the pending recession and subsequent job losses for the region. Exhausted by the devastating effects of unsustainable economic growth, including the impact on transportation, housing and quality of life, many hoped for a return to the way of life they had enjoyed in the past. But now, three years later, with few jobs available, soaring housing costs and an ongoing fiscal crisis for local and state governments, can we honestly say that we are better off today than we were then?

San Francisco Index

Unemployment	6.6%
Unemployed	27,758
Employed	390,808
Help-Wanted Index	23
Housing-Affordability Index	12
Median-Priced Home/Condo	$554,500
Average Asking Rent	$1,763
Tenant-Demand	$1,727
Lowest-Priced Rental	$500
Office Vacancy Rate	20.34%
Gallon of Gas	$2.00

(All data listed are one-year averages, except for lowest-priced rental)

Sources:
1 & 2: California’s Employment Development Department. Data is not seasonally adjusted.
3 & 4: U.S. Census Bureau. Standard error for 2003 was 1.7 percent.
5: MetroRent. Graph represents the average asking rents for all unit types. Tenant demand is defined as the maximum rent a prospective tenant is willing to pay for an apartment.
6: U.S. Department of Labor. 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. 7: The Conference Board. Data is derived from help-wanted classifieds in the San Francisco Chronicle and the San Francisco Examiner; the benchmark stood at 100 for the year 1987. 8: DataQuick. Median home price includes all single-dwelling homes and condominiums, new and resale. 9: John Oldfield with Prudential California Realty. 10: Phillip J. Boersma with Arroyo & Coates; www.phillipboersma.com 11: 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. 12: San Francisco Rent Board. Fiscal year runs from previous July through June of listed year. 13: BT Commercial Real Estate.
San Francisco Index Sources: (in order of appearance) California ;Employment Development Department (items 1-3); The Conference Board; California Association of Realtors; DataQuick; MetroRent (items 7& 8); San Francisco Chronicle; BT Commercial Real Estate; and AAA of Northern California.

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 editor of the San Francisco Apartment Magazine and the PPMA News. He may be contacted at 415-392-3770.