San Francisco Apartment Association

Feature

San Francisco Economic and Apartment Market Overview

by Lawrence Souza

Demographics
Due to the high cost of living and extremely low housing affordability, the metro area and San Francisco will lose population and households over the next five years to low-cost inland valley locations and metro areas in the desert and mountain states.

San Francisco accounts for over 45% of the metro area’s population base. Total population in the San Francisco Primary Metropolitan Statistical Area (PMSA) is projected to decline from 1,720,130 in 2004 to 1,704,100 in 2009, falling by 0.2% and losing 3,200 people per year. For this same time period, total population in the city of San Francisco is projected to decline from 768,430 to 757,130, falling by 0.3% and losing 2,260 people per year. Through 2009, San Francisco is projected to account for 70% of all population loss in the metro area.

Total households in the San Francisco PMSA are projected to decrease from 678,170 in 2004 to 669,490 in 2009, falling by 0.3% and losing 1,736 households per year. For this same time period, total households in San Francisco itself are projected to decrease from 326,720 in 2004 to 322,600 in 2009, falling by 0.3% and losing 824 people per year. Through 2009, San Francisco is projected to account for 47% of all households lost in the metro area.

Residential Housing
From 2004 through 2009, total housing demand in the entire Bay Area is projected to average 35,000 units per year, and total residential housing permits are projected to average 25,000 units per year, resulting in a shortage of 10,000 units per year. This will continue to put upward pressure on rental rates, occupancy rates and housing prices, and downward pressure on affordability.

Year-to-date as of November 2004, Bay Area multifamily permits (communities with 5+ units, unadjusted for condos) totaled 8,565 units, 14% lower than 9,995 permits issued during the same time period in 2003. The majority of the 2003 permits were for affordable housing and condominium units; market-rate permits actually declined during this period. Multifamily permits are projected to drop 3.6% to 9,635 units in 2005.

Apartment Market
With renters occupying 42% of the Bay Area’s total housing stock, gross demand for rental housing is projected to average 10,500 units per year for the next five years. There were 6,750 units of new construction delivered in 2004, compared to 4,590 units in 2003. New construction is projected to drop to 6,250 units in 2005 and rise to 6,780 units in 2006. Net absorption totaled 9,440 units in 2004 and is projected to rise to 10,013 units in 2005 and then slow to 9,811 units in 2006.

Vacancy rates for the Bay Area, dropped to 6.6% in 2004 from 7.4% in 2003. Vacancy rates are projected to drop to 5.6% in 2005 and to 4.7% in 2006. Effective rents dropped by 3.1% in 2004, and they are projected to rise by 2.7% in 2005 and 5.7% in 2006. Future rent growth in the region is supported by rising incomes and positive demographic trends. The median household income for the overall Bay Area is $71,500, San Francisco PMSA is $65,700, San Jose PMSA is $86,130, and Oakland PMSA is $67,300. At these income levels, assuming households allocate up to 30% of their income toward housing, residents of the Bay Area can afford to spend up to $1,790, $1,640, $2,150, and $1,680 per month on total housing costs, respectively.

With renters occupying 51% of the metro area’s total housing stock, gross demand for rental housing is projected to average 2,500 units per year for the next five years; and with five to seven jobs accounting for one unit of apartment demand, gross absorption for apartments in the metro area is projected to average 2,000 to 2,500 units per year for the next 10 years.

With renters occupying 65% of San Francisco’s total housing stock, gross demand for renter housing is projected to average 2,000 units per year for the next five years; and with five to seven jobs accounting for one unit of apartment demand, gross absorption for apartments in the metro area is projected to average 900 to 1,200 units per year for the next 10 years.

San Francisco PMSA vacancy rates dropped to 5.2% in 2004 from 6.6% in 2003. Vacancy rates are projected to drop to 4.75% in 2005 and to 4.1% in 2006. Effective rents dropped by 2.3% in 2004 and are projected to rise by 3.2% in 2005 and 6.2% in 2006.

Single-Family Housing Market
Bay Area home prices, year-over-year as of November 2004, rose 15.2%; only 14% of Bay Area households can now afford the median-priced home of $661,660—now the least affordable place to live in the country. Since 1984, San Francisco PMSA home prices have appreciated an average of 7.5% per year. San Francisco home prices, year-over-year as of November 2004, rose 23.1% to $706,500. Home prices in the Bay Area and San Francisco are projected to appreciate 8% to 12% in 2005 and 4% to 5% per year through 2008.

With owners occupying 58% of the Bay Area’s total housing stock, gross demand for owner-occupied housing is projected to average 14,250 units per year for the next five years; with owners occupying 35% of the San Francisco metro area’s total housing stock, gross demand for owner-occupied housing is projected to average 1,200 units per year for the next five years.

Conclusion
The local economy is poised for the next rebound, as firms are migrating and expending in San Francisco to take advantage of significantly lower rents and amenity-rich locations. San Francisco is projected to lead the Bay Area recovery, driven by job growth in the financial, manufacturing, services and trade-transportation-utilities sectors. Significant growth is projected for the tech sector in 2005-6, driving up apartment occupancy rates and rent growth.


The 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.