the sheridan report
How Long Can San Francisco Beat Back the Economic Doldrums?
By Matthew C. Sheridan
It was a milestone that few noticed, but nonetheless carried some symbolic weight. In March, California’s Employment Development Department published its latest employment numbers for San Francisco, revealing that the region had once again pushed past the 1,000,000 jobs mark. This threshold had not been crossed since the lead-up to the dot-com era, when in November 1997, the employment number for the San Francisco MSA—which also includes the counties of Marin and San Mateo—broke through the 1,000,000 jobs mark. The region still needs to add some 115,000 additional jobs in order to match the all-time high numbers reached in December 2000.
Lately, San Francisco appears to be one of the few places around the country immune to economic and housing pressures. An island in a sea of turmoil, the city continues to add jobs and home prices remain relatively stable—with foreclosures up just slightly and residential rents gently edging upwards. Despite our local government budget shortages, San Francisco continues to hum along.
Recent numbers from The Conference Board confirm that San Francisco and San Jose are two of the metro areas posting the most advertised job vacancies for their sizes. The online listing numbers stand in stark contrast to the national labor market, which in May saw 45 of the 52 metro areas reporting a smaller number of advertised vacancies than last year. Nationally, “The demand for labor will likely be sluggish this summer,” said Gail Levanon, economist at The Conference Board.
Across the state, job growth has sputtered to a stop, with the unemployment rate now at 6.2%, up from 5.2% a year ago. In comparison, the San Francisco Metro Division unemployment rate stands at 4.2%, with total industry employment in the West Bay counties rising by 22,600 jobs, or 2.3% between April 2007 and April 2008. That’s the fastest nonfarm job-growth rate of the 10 largest metropolitan areas in California. The EDD reported that professional and business service sectors, as well as leisure and hospitality, lead the way, with only the financial sector shedding jobs.
What’s holding San Francisco up? In addition to the buoyant industries listed above, the latest UCLA Anderson Forecast points out that after the Bay Area shed manufacturing and construction jobs in late 2006 and early 2007, the region started adding jobs in the manufacturing sector, based upon increased demand for electronics and imports. Thanks in part to the well-known lack of new home construction in San Francisco, the city also has less exposure to job losses in the construction industry. Both Los Angeles and the Bay Area have developed a healthy immunity to job losses in construction, because it is just a minor component of our regional economies: 3.8% of all jobs. In the rest of the state, construction comprises 8.4% of all jobs.
The Forecast, which has been avoiding the “R” word, continues to predict a very weak economy for California overall for the rest of 2008—thanks to ongoing losses in construction and financial activities. The report points out that California has never experienced a recession without a simultaneous national recession as well.
Others fear the worst may not be over, especially with the fallout from the credit crisis continuing its massive impact on real estate. “It’s a really fragmented, chaotic time,” commented Mark Levine, a vice president at PNC ARCS. With bank after bank declaring massive write-offs from their sub-prime losses, the credit markets remain skittish. “There’s extreme volatility out there,” warned Levine, who also predicted that rates may be going up.
Although Fannie Mae and Freddie Mac have tightened credit standards, for borrowers it’s a scary time. “Is the lender still going to be around in 45 days?” worried Levine. “There are so many rumors out there: people losing their jobs; institutions shutting down.” Levine believes the risk to the financial markets is very real and still out there. “The environment may get worse, before getting better,” he concluded.
Rocketing commodity prices, especially oil, led the Federal Reserve last month to redirect its attention at staving off inflation, signaling a pause in the interest-rate cuts they have been handing out like candy since the housing market started to tank late last summer. Not since 1982 has the Fed cut rates so dramatically; it appears, however, that none of these cuts have been passed onto consumers—as interest rates are largely unchanged from last summer.
This past spring, the Office of Federal Housing Enterprise Oversight did roll out higher conforming-loan limits, increasing them from $417,000 to a maximum of $729,750. These higher loans will now be eligible for purchase by Fannie Mae and Freddie Mac, and may propel skittish lenders back into the market. For some parts of the Bay Area, this is good news; but in San Francisco, where the average home price is still well above the maximum limit, it may be a case of too little, too late.
Already, on the commercial side, San Francisco’s downtown office market has begun to rapidly cool after a red-hot year in 2007. According to a recent report by NAI BT Commercial, rent growth in the first quarter of 2008 continued to decelerate, though the vacancy rate remained steady at just above 10%. In a sign of the economic uncertainty that plagued the business markets in the first quarter—even here in San Francisco—only one major leasing deal of over 100,000 sq. ft. went through during the first three months of the year. Sales were bleak as well, with only one Class-A Financial District office building traded. The numbers would have been worse overall had it not been for our old friends, the “technology companies” South of Market, which helped offset the slowdown in activity for the banking, mortgage and financial services sector. One commercial developer told me recently about being inundated with calls from desperate architects and engineers seeking work. No matter what, this does not bode well in the short-term for San Francisco.
On the residential side, the talk around town continues to be upbeat, though. While sales of apartment buildings have slowed, prices remain relatively stable. The for-sale home market—at least in the city—is showing no real signs of downward pressures.
The real gem remains the rental market. Limited supply, too many tenants, foggy weather, insane laws—it’s a perfect recipe for keeping San Francisco apart from the rest of the nation. Just stand on Fell Street during the running of Bay to Breakers and watch all the young, drunk, naked people who have selected our little island as their home. Okay, maybe it isn’t the chance to run intoxicated though the streets that brought these young people to San Francisco; it probably has something to do with Google and Apple. These regional employers are a leading factor in the lure San Francisco offers.
“I am surprised if a month goes by when I don’t see a rental application of someone who works for Google or Apple,” observed J.J. Panzer, a property manager and broker with Real Property Management. “That’s what’s propping up our economy.” Applicants insist on being near a “Google stop,” Panzer relayed (Google and Apple provide their employees with private bus shuttles that stop throughout the city).
Panzer is also seeing more picky and price-motivated tenants. While most vacancies are filled relatively quickly and at high rents, he recently had one vacancy on a high-traffic street that took six weeks to rent, and only after he lowered the rent $200.
While parking still makes a difference, he now sees tenants seeking to live a “green lifestyle” in the city. “More and more people are committing to transit,” said Panzer. “Fewer tenants are commuting to Silicon Valley; many are just working from home or commuting downtown.”
Can San Francisco weather the storm? Maybe it, too, will sink into the economic morass enveloping other parts of the globe. But, maybe, just maybe, we have what it takes to survive.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or SF 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 SF Apartment Magazine and the East Bay’s Rental Housing magazine. Copyright © 2008 SF Apartment Magazine. All rights reserved.