The Condo Afficionado

written by
Miles Garber

The San Francisco condo market is well-
positioned for a post-COVID rebound.

The San Francisco condominium market began 2020 with firm footing; sales were robust at new-home communities and there was a wave of new project openings. Despite the strong start, the San Francisco condominium market had to respond in short order to COVID-19. Following the initial slowdown from the pandemic, which lasted from late February until the end of May, the market rebounded in the summer and has significantly outperformed the apartment market. Although price reductions have occurred, and certain areas of the city have fared better than others, the overall condominium market has shown resilience compared to the Great Recession. 

The San Francisco condominium market started the year with strong fundamentals. The median price stood at $1.2 million, unchanged from the year before. Sales of existing condominiums were up over 30 percent in January and February compared to the prior year, and most new-condominium communities were also experiencing strong sales. In response to the shelter-in-place ordinances enacted in the seven Bay Area counties in March, in-person property tours had ceased, new residential construction had stopped, and new-home sales centers had moved to virtual showrooms. 

Predictably, sales of existing and new condominiums slowed dramatically in March. By April, sales volumes had plummeted before hitting an absolute bottom in May when less than 100 existing condominiums sold, which was more than a 70 percent decline in sales transactions from the prior year. By June, when the seven Bay Area counties eased the shelter-in-place ordinances, and the Federal Reserve slashed the discount rate to near zero, sales started to recover. From July through September, the market posted higher sales volumes than the same period a year ago and has remained strong through the end of 2020.  

Sales have rebounded in response to both improving economic conditions and price reductions. The overall condominium median price has declined by 4.6 percent since March. However, some neighborhoods, such as South of Market (SOMA), have experienced price declines between 10 and 12 percent. Simultaneously, some new condominium projects have been forced to reduce pricing by up to 15 percent to pay down construction loans and meet lender-mandated pre-sale requirements. Despite these declines, the condominium market has fared much better than the apartment market. According to Zillow, rents in San Francisco have declined by over 30 percent since the pandemic began.  

While sales have rebounded, and the overall market has only had to endure modest corrections, the overall inventory of unsold new and existing condominiums has increased by over 35 percent from the same time a year ago. Fortunately, the months of remaining inventory (the number of months it would take to sell all the unsold condominium inventory) is 4.4 months. With a balanced market defined at 6.0 months, San Francisco's inventory condition is only a minor headwind. The market's unsold inventory is in stark contrast to San Francisco's apartment market, where the vacancy rate, according to CoStar, currently exceeds 25 percent, the highest vacancy rate the city has experienced in over 40 years.

While the media has drawn parallels between the COVID-19 induced recession and the Great Recession, some notable differences exist between the condominium market's performance during these two recessions. First, San Francisco delivered minimal new condominiums in the past few years. From 2018 through the end of 2020, San Francisco will have delivered approximately 2,500 new condominiums. In the three years leading up to the Great Recession (2006-2008), the market built over 4,500 condominiums. Additionally, San Francisco built over 2,000 condominiums in 2008 alone. The San Francisco supply overhang is minimal compared to 2008, when prices fell by over 30 percent.

Another stark contrast has been the number of new-construction buyers who have chosen to close escrow during the pandemic. At the new communities that Polaris Pacific is selling, more than 90 percent of buyers closed escrow. In contrast, during the Great Recession, less than half of in-contract condominium buyers closed escrow following the fall of Lehman Brothers. The third difference is the buyers' view that the pandemic is an external shock, more akin to 9/11. In contrast, the Great Recession resulted from years of lax underwriting standards and overbuilding that, eventually, the market had to resolve through foreclosures and significant price reductions. 

In the coming weeks, coronavirus vaccines will become available to millions of Americans, propelling city residents who temporarily fled San Francisco to return. While this pandemic will permanently alter certain aspects of future condominium building design, this crisis's market effects will pass. Unlike the Great Recession, where a dark shadow lingered over San Francisco's condominium market years after it had recovered, this recession will likely result in the opposite outcome. With developer and investor appetite to build future apartments in the city waning, building new condominiums will become the more compelling option.

Miles Garber is the vice president of research at Polaris Pacific, the largest brokerage firm of new condominiums on the West Coast. He runs the research consulting division and oversees the Polaris Pacific Report, a monthly market intelligence report that tracks sales prices and absorption rates of new residential condominiums.