Off the Charts

written by Jay Greenberg

2018 was a record-breaking year for the San Francisco real estate industry—despite rising interest rates and an atmosphere of uncertainty.

Iam writing this article in late January and am very excited about the apartment market for 2019. This report contains the usual value indicators and sales data that I report on each quarter for the 5-9-unit and 10-plus-unit sectors of the market. 2018 was an amazing record-setting year, especially when considering the fear and uncertainty created by the proposed Costa-Hawkins repeal (Prop 10) and the rising interest rate environment present all year long.

As a long-term San Francisco apartment owner and real estate broker, I am very sensitive to the term “greedy San Francisco landlords,” and I would like to shed some light on the real reasons for the housing shortage and affordability crisis in the city. The Bay Area economy is dynamic and continues to expand, while new apartment construction is slowing (all good news for apartment owners). Another piece of good news is that interest rates have been dropping as of January 2019.

The following are approximate 2018 year-end statistics for the 5-9-unit and 10-plus-unit sectors versus the same time period for 2016, 2017 and 2018.

5-9 Units
The average price per square foot had increased from 2010 through 2015 until we hit our peak pricing level of $652 per square foot. The cost per square foot dropped to $544 in 2016, and then dropped again to $535 in 2017. The average price per square foot positively bounced back in 2018 to $561 (still well off the high of 2015). Similarly, Gross Rent Multipliers (GRMs) had jumped significantly from 2010 through 2015, and in 2016 we started to see a pullback. In 2016, the average GRM decreased to 18.19, and then again in 2017 to 17.79. In 2018, the average GRM bounced back to 18.32.

The price per unit followed a similar pattern. The price per unit escalated from 2010 until the peak in 2015. The price per unit pulled back to $463,000 in 2016 and $457,000 in 2017, and then it rebounded in 2018 to $496,000. Overall, pricing levels remain high and 2018 value indicators are well above all previous years, excluding 2015 peak levels.

Year-end dollar volume in the 5-9 unit sector has been very strong, increasing every year since the financial meltdown in 2008. We hit peak levels in 2018 with $317 million dollar volume. Dollar volume was $301 million and $299 million in 2016 and 2017, respectively. We ended 2018 with 104 transactions. There were 102 transactions in 2016 and 105 transactions in 2017. 

10-Plus Units
The average price per square foot was $556 in 2016 and $555 in 2017. There was a significant jump in 2018, when the year ended with an average price per square foot of $621. The average GRM was 17.12 in 2016 and 16.85 in 2017. We saw an uptick in 2018 with an average year-end GRM coming in at 18.33.

Price per unit numbers followed a similar trend. The average price per unit was $403,000 in 2016 and $404,000 in 2017. There was a nice increase to $471,000 in 2018.

Dollar volume in the 10-plus-unit sector was outstanding in 2018 with a record breaking $1,153,000,000 in sales. Dollar volume in this section was very low in 2016, with sales totaling $447 million. In 2017, sales picked up to a stronger $624 million. We ended 2018 with 103 transactions. There were 66 transactions in 2016 and 88 transactions in 2017. 

The source of the numbers reported come from Jay Greenberg & Trigg Splenda Alain Pinel Investment Group, San Francisco Multiple Listing Service, and Costar Comps.

The Big Picture
Value indicators in both sectors of the market are higher than last year’s figures. The data is extraordinary when you consider that in the early spring of 2018, news was circulating that a proposition for the repeal of Costa-Hawkins was coming. By May, it was confirmed that enough signatures were collected to put the measure to vote.

Inventory levels ballooned over the course of the 2nd and 3rd quarters. By the end of 3rd quarter in the 5-9-unit sector, inventory levels were 85% higher than a year earlier. In the 10-plus-unit sector of the market, inventory levels were up 90% on a year-over-year comparison. With a mega increase of inventory and a shrinking buying pool, the market responded with the highest sales volume in the 10-plus-unit sector that we have seen in the past decade. The dollar volume was over $1.1 billion, which is a more than 60% increase from the next biggest year (2013). We also have record pricing for the price per square foot and price per unit in the 10-plus-unit sector. The 2018 GRM indicator finished in 2nd place compared to years in the past decade.

I had three record-setting sales that occurred between May and November 2018, per the San Francisco MLS. One was the highest price per square foot for a rent-controlled building with more than 15 units (resident manager required) at $1,042 per foot. Another was the highest price for a rent-controlled building with fewer than 15 units, which sold for $12.5 million. And finally, the third was the highest price for a rent-controlled 12-unit building that sold for $8.5 million.

In a year that was dominated by fear, uncertainty, and rising interest rates, we saw record-setting dollar volume, sales, and pricing indicators. 2018 was
an amazing year.

I recently watched a very interesting YouTube video called “The Insane Battle to Sabotage a New Apartment Building Explains San Francisco’s Housing Crisis.” I would recommend anybody who is interested in the state of housing in San Francisco to watch this video.

As a San Francisco landlord and apartment broker for the past 30 years, I’ve had the privilege of dealing with thousands of apartment owners, from all walks of life. The “greedy landlord” picture that the media paints is not the real picture. Housing costs are as high as they are in San Francisco because of the city government. Free market values are created by the economic forces of supply and demand. When demand is higher than supply, values rise.

Watch the video mentioned above to see how the city sabotages projects that comply with city regulations and codes. City government does not comply with their own planning and building codes, making it virtually impossible to complete projects. The city politicians say they need more housing, but then they sabotage the process.

The headline on the front page of today’s SF Examiner reads “Boarded up, Pay Up.” San Francisco Supervisor Aaron Peskin is proposing a vacancy tax on vacant retail space, and he has talked about doing the same for vacant apartments.

I am not aware of any private business that is forced by government to conduct business. If your tailor decided to go to Europe for a few years and lock up his shop, should the local government be able to tax him? If I want to hang up my license for a few years and go to Brazil and surf every day, should I be taxed by the city for not conducting business? Property owners need an advocate in the media and in city hall. I also believe our industry can do a better job of framing what is happening. City government is creating our housing crisis and apartment owners should not be the scapegoat.

On a more positive note, fueled primarily by technology and health care, the Bay Area economy continues to expand, boosting rental demand along the way. The tepid construction activity and softening of new units coming to the market have pushed rents up 3.9% year-over-year through late 2018, putting our rents at nearly double the national average. Employment growth is accelerating, with the metro adding 56,700 jobs in the 12 months ending in September 2018. It’s a stronghold for tech, but the professional and business services sector led growth with the addition of 17,800 positions, while education and health services gained 13,200 jobs.

A notable development in the works is Mission Rock, led by Tishman Speyer and the Giants baseball team. The public-private collaboration includes the port, city and county of San Francisco, and is set to transform a 28-acre waterfront parcel into a mixed-use neighborhood with some 1,400 residential units and 1.4 million square feet of office space.

Interest rates had been climbing through most of 2018, and as of January 2019, rates have been dropping. Current 3-to-7-year fixed rates are in the mid 4% to 5% range. While rates are significantly higher than a few years ago, the rates are historically excellent.

I am very excited about 2019 and am looking forward to sharing success with everyone in our industry.

For additional information related to any data points and/or market news, please contact Jay Greenberg at