Why hasn’t San Francisco’s residential real estate market collapsed yet?
Sorry if this is an ignorant question, but given almost everyone seems to agree that the commercial market is complete fucked in SF, there are bad loans, vacant office buildings everywhere, etc. why are Rents for apartments and condos/homes still so high?
am I misunderstanding something fundamental about the relationship between commercial real estate values and residential values, or is the market simply too illiquid for the collapse to already be reflected in today’s values? Appreciate any explanations/opinions as I am not an expert on these topics.
I think people just aren’t moving. Yes SF office is struggling big time, but a big reason for that is the city’s high concentration of tech-oriented jobs and companies that are choosing not to spend money on office space that they don’t need. The people who don’t have to move simply didn’t. With unemployment still low and wages still growing at a healthy rate, there has been enough of a runway for the multi market to stay afloat. That said, I would not be surprised to see some real cracks start to appear if the Fed gets aggressive again with rates.
As for values, I would argue that a general lack of volume (along with the above) has allowed nominal residential cap rates to remain compressed. If forced selling were to pick up - which should happen over the next few years - we’d see a lot more expansion as sellers are forced to bridge the gap between the bid-ask spread.
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You should also probably be wary of accepting facile narratives like "SF is just a giant homeless encampment!" or something like that - it's still an attractive place to live, despite what Fox "News" likes to claim.
Also, why should there be an intrinsic correlation between office occupancy and residential occupancy in 2023? We know that office vacancy is being driven largely by WFH - which means that residential space is even more at a premium than it was, since people are spending even more time at home. This isn't necessarily a case of urban decline, where businesses and residents are fleeing en masse - it's just that working habits have fundamentally changed, everywhere, but that doesn't mean that the things that people value in a residential neighborhood have changed.
This^, still lots of attractive things about SF to people and I don't see that changing despite what people shout on Fox News.
Well as it concerns single family homes, home prices have recently dropped a bit but there is no looming crash unless we see a severe tech or broader economic crash - multiples worse than what happened when rates rose.
The office situation is disconnected from residential for a variety of reasons but one is that WFH and remote work has left plenty of people in the area who are just not coming into the office as much or at all. As it relates to residential, there simply is not enough housing - almost every part of the city and even larger Bay Area is maximally built out. Sustained demand is greater than the housing supply. You have to travel an hour and half out from San Francisco or San Jose to find new housing. Lastly, a majority of homeowners have low fixed rate mortgages and will not sell simply because of a temporary dip in home prices. It makes no sense to sell at a less than ideal price and then have to find another home which will be more expensive than your current one and with a mortgage at interest rate ~2.5x unless you find yourself in a liquidity crunch.
The tech crash basically proved that homeowners were largely unaffected. That tells us that most of these people impacted were renters, homeowners with liquidity, or ones who were able to quickly find other jobs. The last group would likely be comprised of engineers.
There's a double whammy in California too because of how property taxes are calculated (which for those unfamiliar, it's calculated based on the price you paid for the home which then grows by a fixed percentage every year that you own it). So you have:
(1) People that have low fixed rate mortgages locked in that don't want to lose them
(2) People that bought their homes 5 - 10+ years ago that have a much lower property tax basis than if they bought a new home today
Good call out on the tax situation. Home prices surged over the last 10 years, so there are definitely a sizable population of homeowners who are paying substantially less tax than they otherwise would.
I do not have the data in front of me so I’m happy to be wrong if presented with it, but I’m willing to bet demand still far exceeds supply.
California has way too much anti-housing NIMBYism even with soaring rent prices and DD & approvals takes 5+ years instead of 1, so many developers don’t even bother.
So prices have dropped. Its one of the few markets that has seen a large decline - Austin tx being one of the largest declines for the year followed by SF, vegas, phx. A lot of it is concentrated to the downtown though for SF. Have also seen condos start to sell below 2016 prices. The narrative from SF locals is that AI startups will be able to absorb the office space but highly skeptical of that being the case. Just in the last 2 weeks we've seen 2000 jobs lost from Bay Area based companies ( not sure how many of those jobs are specifically in SF) but if even a decent chunk, wouldnt be surprised to see rents and home prices decline further.
There has been a significant decline in SF proper. The Bay Area as a whole has seen less of an impact than SF but the market overall has a big mismatch between supply and demand still. What has been happening is that the density has been falling as people who were previously living 3 in a 2 bed are now 2 in a 2 bed as people have moved out. But there is still more demand than supply so at the end of the day prices will remain high.
Bro have you seen how many homeless people there are in SF? Demand simply outpaces supply by big margin!
People still live there they just dont go to the office lol
Strong employment
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