Feature
by Lawrence Souza
The local economy is poised for the next rebound, reflected in the following factors: rising NASDAQ stock prices, up 100% since 2003; sustained gross domestic product, high worldwide chip sales, rising levels of venture capital, initial public offerings and mergers and acquisition activity, improvements in hotel occupancy rates, tourism and passenger traffic through the local airports, and rising commercial net absorption, occupancy rates and rental rates.
The nonfarm employment growth rates for the San Francisco Primary Metropolitan Statistical Area (this PMSA includes the counties of Marin, San Mateo and San Francisco), peaked at 4.9% year-over-year (YOY) in August-September 2000, then dropped to -8.6% YOY as of March 2002, a loss of over 102,000 jobs. Since March 2002, nonfarm employment growth rates have been in a solid upward trend, reaching 0.9% YOY in November 2004. Nonfarm employment growth is projected to increase by 1.2% in 2005, adding 11,800 jobs to the metro area. One of the driving forces behind this growth are firms migrating and expending in San Francisco to take advantage of significantly lower rents and amenity-rich locations in the Financial District and South of Market.
San Francisco and Oakland metro areas are leading the recovery in the Bay Area and are projected to move into the growth phase of their business cycle in 2005. The Bay Area economy is forecast to peak in 2006-8, before falling back into recession by 2011-13. In 2005-6, employment sectors leading this recovery will be education and health services (up 2.6% YOY as of November 2004), financial activities (2.5% YOY), manufacturing (2.4% YOY), professional and business services (1.8% YOY), and trade-transportation-utilities (1.0% YOY).
Falling business bankruptcies and job-loss announcements indicate the worst of the tech slow down is over. Significant employment growth is not projected until the middle of 2005 and into 2006. Over the past few years, internal drivers of growth have been limited due to falling population and net migration trends. Travel and tourism, tech services, financial services, biotech and international trade are all in the recovery stage. Hotels and restaurants have been reporting renewed vitality since the summer of 2003. Passenger volumes through San Francisco International Airport and tourism activity have picked up significantly and are now at pre-9/11 levels. The benefits of this improvement, however, have been limited to leisure travel. Business travel has not been affected.
The downturn in information services is over, and firms are gearing up for the next technology refresh cycle. Biotech continues to receive investor confidence as evidenced by rising equity values, improving venture capital placements, and facilities investment by bio-tech real-estate developers.
In 2005, growth in the financial-services sector will be limited and volatile as major money-center banks continue to consolidate and ramp up their mergers and acquisition activity. International trade is expected to pick up as the dollar remains weak, and Asian economies continue to grow rapidly, driving demand for value-added manufacturing, business-financial services and other products.
San Francisco has the long-term potential for growth as evidenced by the nearly two-thirds fall in the cost of renting office space from the peak in late 2000, making it less expensive than Silicon Valley and about on par with the East Bay and the national average.
Despite any congestion and density issues, considerable new commercial, office, industrial and residential space will become available at Hunter’s Point, Mission Bay, the Presidio and other redevelopment locations. Therefore, adequate and modern facilities will be in plentiful supply for expansion, relocation and growth.
The local economy stabilized in 2004. It will start to grow in 2005 and accelerate in 2006, remaining in the growth phase of its local business cycle through 2008. The potential for rapid growth is encouraging due to the development of Mission Bay, the new UCSF campus, the Trans-Bay Terminal and the waterfront.
A recovering economy, long commutes and traffic congestion, the emergence of the echo boomers, and baby boomers retiring and moving to the urban core, will create and maintain demand for amenity-rich infill housing. This should put upward pressure on occupancy rates, rents and prices for apartments and condominiums in San Francisco’s Downtown and SOMA districts from 2005 to 2008.
Employment
The San Francisco PMSA economy added 71,000 new jobs since 1985, growing by 0.4% per year. Total employment in the San Francisco metro area is projected to increase from 969,202 in 2003 to 1,048,244 in 2010, growing by 1.4% and adding 14,000 new jobs per year.
Major employers in the San Francisco PMSA include: United Airlines, University of California San Francisco, Oracle, Wells Fargo, Bank of America, AT&T, UCSF Medical Center, Pacific Gas and Electric, SBC Communications, Kaiser Permanente, California Pacific Medical Center and Genentech.
San Francisco is the financial center of the West Coast. Firms in technology, financial and business services, multimedia, and bio-medical technologies have driven job growth over the years. San Francisco accounts for 18% of all jobs in the Bay Area; and it will account for 10% of all jobs created in the Bay Area through 2010. Over the past 12 years, San Francisco has undergone significant economic revitalization and real-estate development. Due to its location and urban amenities, the city has attracted small start-up companies, bio-tech companies and software developers, for example. Total employment in San Francisco is projected to increase from 393,206 in 2004 to 430,316 in 2010, growing by 1.5% and adding 6,130 new jobs per year. In 2005, total employment is projected to grow by 2.5%, adding 9,650 jobs to the local economy. The majority of these jobs are expected to be concentrated in health care, biotechnology, computer information systems, retail sales, financial and business services, construction and education.
Unemployment Rate
The San& Francisco PMSA unemployment rate dropped to 4.1% as of November 2004, down from 5.1% in January 2004 and November 2003. The unemployment rate is projected to average 4.0% in 2005, down from 4.7% in 2004 and 5.7% in 2003. Inflation for 2005 is projected to average 2.8%, up from 1.2% in 2004 and 1.8% in 2003.
Unemployment rates are at the lowest they have been since June 2001 and are below the state average of 5.7% and the national and regional averages of 5.4%. Unemployment rates in San Francisco, as of November 2004, averaged 5.5%, down from 6.0% in 2003 and 6.9% in 2002. In 2005, the unemployment rate is projected to fall to 4.2%.
Unemployment rates over the past two years have been declining not necessarily from rapid job growth but from rising self-employment, contraction in the labor force, out migration and low population growth. Unemployment rates are projected to continue to drop over the next few years as firms add more workers to meet demand. Employers will have to hire more workers over the next 18 months as the economic expansion continues and local productivity rates reach their limits.
Technology Sector
Technology jobs dominate the Bay Area economy. Future demand for residential housing will be determined by the creation of highly skilled, highly educated and highly paid jobs in the tech sector. The tech sector accounts for 32% of all wages and 11% of all jobs in the Bay Area. Long-term job gains are dependent on the health and recovery of the tech sector. In 2005, the slowdown in the tech sector is expected to be short-lived. In 2004, global chip sales rose 28.5% YOY due to capital spending by chipmakers and high-consumer demand for cell phone, digital cameras, games, music players and other similar products. In 2005, global chip revenues are projected to rise 3% to 5%, 14.6% in 2006 and 11.7% in 2007; and chip-making tools and equipment revenues are projected to be flat in 2005, after a 10% to 15% growth in 2004.
Venture Capital
In 2005-6, high-tech job growth in the Bay Area will be driven by massive flows of venture capital financing. As more funds are targeted toward start-up companies, firms are compelled to purchase new technology and equipment, lease space and hire workers. All of these factors, along with associated multipliers affects, create new jobs and drive demand for housing in local markets.
Venture capital flows into the Bay Area have been a major source of economic development and job growth for over 10 years. Silicon Valley has captured over 30% per year of all venture capital raised in the United States since 1996, and it will continue to capture the bulk of capital raised for the foreseeable future.
The environment for venture capital investment provides the region with comparative advantages over other metropolitan areas across the globe. Such advantages include agglomerations of venture capital firms and financial institutions, and existing high-tech and bio-tech service and manufacturing firms and suppliers; a highly educated and skilled workforce; a high concentration of colleges and research universities, and leading-edge public and private research institutes; and access to global markets, with an established and integrated network of transportation hubs.
Silicon Valley is poised for the next tech boom, driven by combined
bio-science and information technologies, continued Internet innovation and investment, nanotechnology, and molecular electronic circuitry. Venture capital returns are down significantly since 2000; however, investors are now starting to invest in early-stage companies, along with focusing their attention on existing investment portfolios and supporting current companies under management.
In Silicon Valley, venture capitalists raised $1.4 billion during the third quarter of 2004, down 35% from $2.2 billion in the second quarter and up 7.4% from $1.3 billion during the third quarter of 2003. For the first nine months of 2004, venture capitalists raised $5.3 billion, 23% more than the $4.3 billion raised during the same period in 2003 and only 5% less than the $5.6 billion raised during the same period in 2002. In the third quarter of 2004, the majority of venture capital was targeted toward companies operating in the following fields: software, networkingand equipment, semiconductors, medical devices and equipment, telecommunications, biotechnology, and media and entertainment.
In the San Francisco/Berkeley region, venture capitalists raised $276 million during the third quarter of 2004, down 34% from $421 million in the second quarter and up 17% from $237 million during the third quarter of 2003. For the first nine months of 2004, venture capitalists raised $1.1 billion, 34% more than the $824 million raised during the same period in 2003 and on par with the $1.1 billion raised during the same period in 2002.
Commercial Real Estate
In 2004, $8.6 billion worth of real estate was sold in the Bay Area, up 91% from 2003; and $3.7 billion worth of commercial property was sold in San Francisco, up seven times that of 2003. The San Francisco office market has seen positive net absorption and falling vacancy rates since the third quarter of 2003, with no new construction. Net absorption spiked to 1.2 million square feet in the fourth quarter of 2004, after averaging roughly 305,000 square feet for the past five quarters. There are now roughly 14 million square feet of available office space in San Francisco, on top of a base of 80 million square feet. Lower relative rental costs, along with high locational amenities, will drive demand for property over the long run. Of the over 80 million square feet of inventory, 33% is located in the Financial District, 28% in the South Financial District and 12% in the South of Market area.
Office availability vacancy rates in San Francisco currently is 18%. Office rents have dropped significantly from the third quarter of 2000, down 68% from $81 per square foot to $26 per square foot.
Next month: Part 2—Demographics and Residential Real Estate.
opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Lawrence Souza, CRE is with the Johnson/Souza Group Inc. He has over 15 years of experience in real-estate economic and financial research and is also a licensed real-estate broker, registered representative and investment advisor. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.