Sheridan Report

Striving for Stability—A Mixed Bag of Indicators

By Matthew C. Sheridan

San Francisco’s economic climate is at last showing signs of stabilization, although the latest numbers tumbling out of a mixed bag of indicators continue to reflect a degree of uncertainty. While tourists have returned to the city, jobs have not. Sale prices of homes are on their annual summer swing upward, although they remain fairly flat when compared to prices a year ago. Office vacancies appear to have bottomed out, yet asking rents continue to decline. Having purged much of the excess generated by the economic boom of the dot-com era, the city appears to be gradually awakening from its economic doldrums.

Last month, our city’s continuing economic woes returned to the national spotlight. The U.S. Census Bureau released the population changes for major cities across the country, and guess what city came in dead last in terms of percentage of residents lost? San Francisco of course holds spot number 242, with a population decrease of 1.5 percent, which translates into 11,929 people departing from our fair city. Keep in mind that these numbers are “backward looking”—representing the change between July 2001 and July 2002. Another year will pass before current numbers are released, and many predict these will reveal a continuing exodus.

If you live or work in San Francisco, these numbers come as no surprise. Anyone passing through South of Market has noticed the number of commercial vacancies that line the blocks of that once-burgeoning neighborhood. Jobs are gone, people have moved away and the city’s tax base is substantially reduced. The correction San Francisco has experienced during the past three years has been truly welcomed by many. As Gabriel Metcalf of the San Francisco Planning and Urban Research Association explains, “Rents were at an unsustainable level, causing overcrowding. Something had to give.” From his perspective, “We are experiencing the ‘balance’ of supply and demand and things are still balancing out.”

Now, however, the city is hungry for some real improvements. Unemployment remains high. For June, it stood at 7.3 percent, slightly above the monthly average for the past 12 months (7.2 percent). Employment numbers, consequently, are slightly down, showing a 1.1 percent decline in the first half of 2003 over the second half of 2002.
Another indicator of the city’s weak employment situation is the Help Wanted Index. Tracked by the Conference Board, a national economic think tank, this index reflects the volume of help-wanted advertising in major cities across the U.S. For San Francisco, the index currently stands at 23, a noticeable decline from the indicator of 36 just a year ago and a whopping decline from 69 two years ago.

In order to propel San Francisco forward, we must work on pulling business back into the city. Firms are always attracted to the presence of a strong skills base in a population. According to Metcalf, the best economic strategy for San Francisco is to transform the city into an even more livable community. This goal will serve to entice a highly educated group of people to settle in the city. Businesses, in turn, will follow. Observing that the fundamentals of San Francisco are sound, Metcalf notes that the city must now focus on major city-wide improvements to our schools and parks as well as creating simple neighborhood remedies such as sidewalk repairs.

A positive sign of a return to stability in San Francisco is the differential found between residential asking rents and tenant demand. This demand, the maximum price a tenant is willing to pay for an apartment, is historically difficult to track. A close statistical analysis by MetroRent, however, reveals a rental differential of only 2 percent during the past two quarters.

Asking rents have finally adjusted to the market—a 27 percent drop from their all-time high—and are almost level with tenant demand.
Landlords who have aggressively lowered rents, explains Michelle Horneff of Property Management Systems, are now experiencing a stable rental market. “It’s been a year and we’re holding steady,” according to Horneff who notes that her company recently rented a unit for the same price as it was a year ago.

The roller coaster ride of the last few years has demonstrated how cyclical our economic world is. The ups and downs of this ride has shown us that no matter how vigilant we are in tracking the latest data and ideas on the economy’s dips and swings, some factors—catastrophes, financial corruption, world crises—are definitely beyond our control and can throw our neat and concise analysis for a loop. Interest rates are currently on the rise. There are hints that the real estate sales market, for months the sole reliable sector of the economy, is starting to weaken. So once again we are back at the gate ready to board another roller-coaster ride in this long, strange and never ending journey of economic ups and downs.
The opinions expressed in this article are those of the author and do not necessarily re�ect the viewpoint of the SFAA or the San Francisco Apartment Magazine.

San Francisco Index

Population Change - 1.5%
Unemployment - 7.3%
Actual Unemployed - 30,400
Help-Wanted Index 23 -
Housing Affordability Index - 12
Median Priced Home - $563,000
Average Asking Rent - $1,731
Lowest-Priced Rental - $500
Office Vacancy Rate - 20.8%
Office Asking Rent (per sq. ft.) - $2.14
Chapter 13 Bankruptcies - +21%
Price Per Gallon of Gas - $1.97

Sources
1: The Conference Board. Data is derived from help-wanted classifieds in the San Francisco Chronicle and the San Francisco Examiner. 2 Source: U.S. Department of Labor, Bureau of Labor Statistics. 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. 3 Source: MetroRent. Graph represents the average asking rents for all unit types. Tenant demand is defined as the maximum rent a perspective tenant is willing to pay for an apartment. 4 Source: 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. 5 Source: DataQuick. Median home price includes all single-dwelling homes and condominiums, new and resale. 6 & 7 Source: Phillip J. Boersma with Arroyo & Coates.

San Francisco Index – Sources: (in order of appearance) U.S. Census Bureau; California Employment Development Department, Labor Market Development; California Employment Development Department, Labor Market Development; The Conference Board; California Association of Realtors; DataQuick; MetroRent; San Francisco Chronicle; BT Commercial Real Estate; BT Commercial Real Estate; U.S. Bankruptcy Court, Northern District of California, San Francisco Division (last 12-months compared to previous 12-month period); and AAA of Northern California.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. 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 the editor of the San Francisco Apartment Magazine and the PPMA News. For a complete version of the Sheridan Report, or to subscribe. please visit www.sheridanreport.com