Market View

Steady Does It

written by Jay Greenberg

Despite our uncertain political future, the local real estate market is holding strong.

Iam writing this article in late January a few days before our beloved 49ers face off against the Kansas City Chiefs in Super Bowl LIV. There is a lot of excitement in the air for the upcoming Super Bowl and the year ahead for our apartment market. This report contains all 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.

2019 statistics show declines in most pricing categories and mixed signals related to activity levels. I have dug into the statistics and provide some perspective on the data. Fundamentals in the marketplace were strong throughout 2019, and I expect them to remain steady through the first half of this year. The city and state continue their backward approach to control housing costs and have become the biggest threat to our marketplace and the city and state economy. I am looking forward to 2020 and sharing my success with everyone in our industry.

The following are 2019 year-end statistics for the 5-9-unit sector and the 10-plus-unit sector versus the same time period for 2016, 2017 and 2018.

5-9 Units
All value indicators climbed steadily from 2010 through 2015. The average price per square foot has bounced up and down since 2016 without any big peaks or valleys. The cost per square foot was $544 in 2016, $535 in 2017 and $561 in 2018. In 2019 we had a marginal decrease with the average cost per square foot coming in at $554. During this four-year period, price per square foot has fluctuated within a five percent range. Similarly, gross rent multipliers had jumped significantly from 2010 through 2015, and in 2016 we started to see a pullback. The average GRM was 18.19 in 2016, 17.79 in 2017 and 18.32 in 2018. In 2019, GRMs dropped to their lowest level in the past four years, with the year-end average coming in at 16.97.

Again, following a similar pattern, the average price per unit escalated from 2010 through 2015 (peak), and then pulled back in 2016. The cost per unit was approximately $482,000 in 2016, $457,000 in 2017 and $496,000 in 2018. There was a slight decrease in 2019 with the year-end average coming in at $489,000. Overall, pricing levels in 2019 retreated modestly, while velocity in the marketplace remained strong.

Dollar volume in the 5-9-unit sector has increased almost every year since the financial meltdown occurred in 2008. Dollar volume was $301 million in 2016, $298 million in 2017 and $317 million in 2018. We hit a new high in 2019 with $349 million in closed transactions. Transaction levels also remain strong in the 5-9-unit sector. There were 102 transactions through 2016, 105 transactions through 2017 and 104 transactions through 2018. We recorded 2017 transactions in 2019.

10-plus Units
2018 was an amazing record-breaking year for value indicators and transaction levels in this sector, especially considering the havoc that the infamous proposed proposition 10 had on our market. The average price per square foot was $556 in 2016 and $555 in 2017. In 2018, the average cost per square foot jumped significantly to $621. At year-end 2019, the cost per square foot retreated to $598. The average GRM was 17.12 in 2016 and 16.85 in 2017. There was a significant uptick to 18.33 times gross in 2018. In 2019, GRMs dropped back to a four-year low, with the average multiplier coming in at 16.56.

The average price per unit was $403,000 in 2016, $404,000 in 2017
and $471,000 in 2018. In 2019, there was a modest dip with the year-end average coming in at $466,000.

Dollar volume in the 10-plus-unit sector was off the charts in 2018 with a record-breaking $1,153,000,000 in sales volume. The previous high came in 2013 with $703 million in dollar volume. Sales totaled $447 million in 2016, $624 million in 2018, and again, more than $1.1 billion in 2018. In 2019 the dollar volume fell to $572 million, a more typical level. Transaction levels were very low in 2015 and 2016. Levels picked up in 2017 and were very strong in 2018. There were 62 transactions in 2016, 88 transactions in 2017 and 103 transactions in 2018. In 2019 there was a significant drop to 65 closings.

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

My takeaway from the statistics above is that prices held steady in the 5-9-unit sector of the market. Two of the three reported value indicators dipped less than 5%, and the cost per unit rose 1.5% on a year-over-year comparison. Activity levels were strong through the year, and the number of transactions increased 2.88% along with an increase in dollar volume of 10%.

The numbers in the 10-plus-unit category show sharper declines and a little perspective is important when looking at the data. As previously mentioned, 2018 was a record-setting year. With that in mind, GRMs decreased 8.5%, price per unit decreased 14.5%, and the cost per foot dropped less than 1% on a year-over-year comparison. The activity levels dropped significantly with a decrease in closings of 37% and a decrease in dollar volume of 50%. By no means is the sky falling in the 10-plus-unit sector of the market. The big drop in activity levels is a result of limited inventory—not lack of demand. This sector of the market is still very competitive, and well-located, quality buildings are still selling at premium prices.

Fundamentals in 2019 were excellent. Employment growth for SF Metro was approximately 3.5%; unemployment in the Bay Area came in below 3%; and in San Francisco, the unemployment rate dropped to a historic low of 2.1%. The office leasing market fueled by tech giants and recent public offerings was excellent all year, setting three new rent level records.

There is currently a severe space crunch in the market as office space is being pre-leased before it is even built. A recent San Francisco Business Times article reported “The Bay Area’s core office market retained its spot as the nation’s strongest office market with the lowest vacancy and highest rents edging out its closest rival Manhattan.” Following suit, the apartment rental market was strong throughout the year. The rental site “Zumper” recorded in June a median price of $3,700 per month for a one-bedroom apartment in the city. That’s the highest ever recorded on Zumper for any city, San Francisco included. Meanwhile, interest rates remain extremely attractive, hovering in the mid to upper three percent range. Forecasts for 2020 are predicting the first half of the year to continue where 2019 left off with a possible shift occurring in the second half of the year, especially as we get closer to the presidential election in November.

The city and state government continue their backward approach to trying to control housing costs. The city government is more focused on extorting money from developers than allowing housing to be built. For some reason, the city just can’t get a handle on the supply and demand concept.

The following are a few low-lights from a recent SFAA meeting I attended. As of January 20, all rental units (not common areas) must have heat 24 hours per day maintained at 70 degrees at three feet above floor level. The board of supervisors is trying to eliminate buyouts entirely (more on this later in the year). Coming later this year, all rental units will need to be registered with the city. Ruling/interpretations of the Ellis act have been fine-tuned so that a settlement no longer relieves the owner of the obligation to “go back” and offer the unit to a previous tenant. New York experienced a 35% to 40% decline in value as a result of vacancy control being imposed.  All three attorneys at the SFAA meeting stated that the board of supervisors will continue to pursue vacancy control and made a strong argument that everyone in the room should support legislative efforts that favor no vacancy control. Dean Preston (supervisor, district 5) was quoted as stating that his goal is to have the city of San Francisco dictate the amount of rent that can be charged for any and every single rental unit in San Francisco.

I am looking forward to another great year as an apartment owner and as a real estate agent specializing in the sale of apartment buildings.

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