The 5+ Unit Residential Investment Market

Economic, political and even environmental volatility were powerful factors in 2018, and promise to continue in 2019: There are a lot of spinning plates right now – locally, nationally and internationally – with the potential for both positive and negative impacts on local housing markets. Generally speaking, last year was a strong one in Bay Area real estate, but varied between a hotter first half and a somewhat cooler second. Our next significant indicators of market direction will probably come with the start of the spring selling season.

Values & Trends in Values

We have a table of 2018 SF building sales with various financial data points, which can be provided upon request.

Selected Market Indicators

Many of the standard statistical indicators for the 5+ unit building market remained quite steady in 2018, though inventory levels of properties for sale have increased. In the general real estate markets around the Bay Area, the softening of the market in the second half of the year coincided with both rapidly increasing financial market volatility and rising interest rates, though simple affordability was a large issue as well.

Sales Breakdown Overviews

Rents & Rent Trends

What is being measured and who is doing the measuring varies in the following charts. Some reflect median list rents for 5+ unit buildings, while others reflect weighted average asking rents for 50+ unit buildings. There is no definitive resource for tracking what rents are actually being paid for which units, and numbers will disagree between differing measurements. What is important in these charts are the sense of general values and trends over time. How they apply to any particular unit is unknown.

This chart going back to 1994 gives more context to the ebb and flow of rental rates over time. Rents are extremely sensitive to changes in general economic conditions.

This next chart is a very approximate calculation of the impact of SF rent control on rental income over time as compared to market rents. It adds up to a substantial amount of money for both landlords and tenants – which is why rent control is such a large, continuing political issue, especially in cities like SF and Oakland, with majority tenant populations.

Selected Economic Factors

Employment growth – in many cases of very well paid jobs – has continued in San Francisco and around the Bay Area. This, of course, is a huge factor in housing markets.

There are over 70,000 new housing units in the San Francisco pipeline, and Oakland’s pipeline has been swelling rapidly as well. However, anecdotally, the word is that developers are quickly pulling back in SF due to increasing land, labor and affordable-housing costs, as well, perhaps, to increasing economic uncertainty. Which may mean that many projects currently in the pipeline may not be built in the near future. For existing landlords, that would mean less new supply coming on market and less competition for tenants from new apartment projects.

After climbing significantly through November, interest rates have been dropping since then, through the first week of January. However, rates are still much higher than the lows seen in the last few years, and predicting what will happen in the near future is very difficult indeed.

Migration: On a domestic basis, more people are leaving the Bay Area to go to other metro areas in the country than are arriving from other metro areas, and housing affordability and tax issues are widely cited as big reasons. However, foreign immigration tips the scale, for the time being, to continued, if slowing, population growth. The latest census data does not yet reflect changes that may have occurred since the anti-immigration position of the Trump administration has come into play. (About 35% of Bay Area residents were born in a foreign country.)

Broker Performance

With the mergers this past year of Paragon Commercial and Pacific Union Commercial into Compass, Compass has become, far and away, the dominant brokerage in the multi-unit residential investment market.

San Francisco Real Estate Looking Back on 2018

There were almost too many local, national and international political, economic, social and ecological factors impacting the 2018 market to count. In the first half of the year, market conditions were about as hot as they’ve ever been, and there were staggering year-over-year appreciation rates. Come summer/early autumn, real estate and financial markets began to shift distinctly cooler. Looking at 2019, there are many wild cards whose impacts are difficult to predict: extremely volatile financial markets, fluctuating interest rates, contentious national politics, international trade issues, spiraling debt levels, employment growth – and a dramatic surge of local high-tech unicorns that plan to go public, which could create a tsunami of new wealth in the Bay Area.

Year-over-Year Annual Appreciation

Comparing 2018 to 2017, the median house sales price jumped 13% or $185,000 to $1,600,000 – the largest annual dollar increase ever (not adjusted for inflation) – and the median condo price increased by $60,000 to $1,210,000.

Year-over-Year Appreciation by Quarter

When one breaks 2018 down by quarter, it is clear that the big increases in price occurred in the first half of the year, after which the median house sales price declined. By the 4th quarter of 2018, the quarterly, year-over-year median house appreciation rate had basically dropped to zero. Condo prices were basically flat Q2 to Q4. This trend of high appreciation rates in the first half plunging during the second half was relatively common around the Bay Area.

Home Prices by San Francisco Neighborhood

The city has more than 70 neighborhoods, and our tables of median house and condo prices by bedroom count run 6 pages. Below the map are 4 tables of selected neighborhoods – let us know if you would like the full reports.

SF Home Sales by Price & Property Type

SF Housing: Era of Construction

Luxury Home Sales Trends
Short-Term & Long-Term

As seen in the next 2 charts, luxury home sales have, generally speaking, held up quite well in San Francisco, though there was an increase in high-end listings withdrawn from the market without selling (3rd chart below).

The number of luxury home listings that were pulled off the market without selling climbed at the end of 2018. Many will be re-listed in 2019.

Selected Market Indicators

The dramatic decline in house listings coming on market (red line) has been a major factor in the median house price appreciation rate since 2012. Condo listing inventory has been significantly impacted by new-condo construction during this period.

Price reductions and listings pulled off the market without selling both hit new highs since the recovery began in 2012.

Hiring has continued to fuel the SF and Bay Area economy. So far, it has continued to hold up.

After a big jump in autumn, interest rates saw a drop of similar magnitude through the first week of January, which is good news for real estate markets.

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.

Happy New Year

Happy Holidays

With the new year upon us, one of the greatest joys of this season is the opportunity to express our gratitude and to look forward to all the great things we’re working on in 2019!

Partnered with Compass, we’re launching four initiatives designed to directly elevate our clients’ experience:

  • 0% interest loans for home prep prior to sale
  • Bridge loans to offer greater flexibility
  • A vendor services marketplace for quality referrals
  • More local philanthropy efforts to give back

Wishing you a bright new year!

Setting the bar

  • Sales Records set by InvestSF in 2018
  • Highest Price, Noe Valley, Q2 2018 Top 10 for 3 Bedroom Condos
  • Highest Price, Noe Valley, 2018 Top 5 for 2 Bedroom Condos
  • Highest Price, District 4, All-Time for All TICs
  • Highest Price, District 4, All-Time for for 3 Bedroom TICs
  • Highest Price, District 4, All-Time for for 4 Bedroom TICs
  • Highest Price, District 5, Q2 2018 Top 3 for 2 Bedroom Condos
  • Highest Price, District 5, 2018 Top 5 for 2 Bedroom Condos
  • Highest Price, District 5, 2018 for 2 Bedroom TICs
  • Highest Price, District 5, 2018 for 3 Bedroom TICs
  • Highest Price, District 5, All-Time Top 5 for 2 Bedroom TICs
  • Highest Price, District 5, All-Time Top 3 for 3 Bedroom TICs
  • Highest Price, District 5, All-Time Top 3 for 4 Bedroom TICs
  • Highest Price, San Francisco, 2018 Top 3 for 2 Bedroom TICs
  • Highest Price, San Francisco, 2018 Top 10 for 3 Bedroom TICs
  • Highest Price, San Francisco, 2018 for 4 Bedroom TICs
  • Highest $/SQFT, Noe Valley, Q2 2018 Top 3 for 3 Bedroom Condos
  • Highest $/SQFT, District 4, All-Time for 3 Bedroom TICs
  • Highest $/SQFT, District 4, All-Time for 4 Bedroom TICs
  • Highest $/SQFT, District 4, All-Time Top 3 for All TICs
  • Highest $/SQFT, District 5, All-Time for 2 Bedroom TICs
  • Highest $/SQFT, District 5, 2018 Top 3 for 2 Bedroom Condos
  • Highest $/SQFT, District 5, 2018 Top 10 for 3 Bedroom Condos
  • Highest $/SQFT, District 5, All-Time Top 3 for 2 Bedroom Condos
  • Highest $/SQFT, District 5, All-Time for 2 Bedroom Condos
  • Highest $/SQFT, District 5, Past 10 Years Top 10 for 4 Bedroom TICs
  • Highest $/SQFT, District 5, All-Time Top 10 for 3 Bedroom TICs
  • Highest $/SQFT, San Francisco, Q2 2018 Top 5 for 2 Bedroom Condos
  • Highest $/SQFT, San Francisco, Q2 2018 Top 25 for 3 Bedroom Condos
  • Highest $/SQFT, San Francisco, Q3 2018 for 3 Bedroom TICs
  • Highest $/SQFT, San Francisco, 2018 Top 10 for 2 Bedroom Condos
  • Highest $/SQFT, San Francisco, 2018 for 2 Bedroom TICs
  • Highest $/SQFT, San Francisco, 2018 Top 3 for 4 Bedroom TICs
  • Highest $/SQFT, San Francisco, All-Time Top 3 for 2 Bedroom TICs
  • Highest $/SQFT, San Francisco, All-Time Top 20 for All TICs
  • * Records per sales reported to MLS at time of close of escrow

See the Latest Sales, Overbids, Underbids + Hot New Listings

InvestSF December 2018 Bay Area Real Estate Markets Survey

We are always hesitant to make too much of a single month’s or a few months’ data: Short-term fluctuations in median sales prices and other market statistics are not uncommon and don’t always give definitive perspective as to where the market is heading on a longer-term basis. Still, many of the changes seen over recent months are substantial – and none more so than the sudden plunge in year-over-year median price appreciation rates illustrated below: a number of counties plummeted into negative territory in November, and the others saw drastic declines.

Again: It is important not to make too much of short-term data. Indicators can also be somewhat schizophrenic at the beginning of a significant market transition – if that is what is occurring – as buyers, sellers and agents struggle to figure out a changing reality.

As a sample of a month by month progression over the past year: Santa Clara County may have been the hottest market in the country in 2017 through early spring 2018. Then it started cooling off more rapidly and more definitively than most other Bay Area markets. This shows up in a number of statistics, including declining year-over-year appreciation rates, as illustrated below.

Q3 2018 Median House Sales Prices

What the Median Price Buys by Bay Area County

Bay Area median home prices vary enormously, and so does what one actually gets for those median prices: From a 3-BR, 2-BA, 1418 square foot home in Oakland to a 4-BR, 3-BA, 2460 square foot home in Lamorinda and Diablo Valley (in Central Contra Costa). Comparing median sales prices is not an apples-to-apple calculation of value.

Bay Area & CA Appreciation since 1990

Bay Area Appreciation since 1990 by County

San Francisco Home Price Appreciation

As a sample of county median price trends, below is a chart illustrating 3-month-rolling median price movements in SF itself – 3-month rolling data doesn’t fluctuate as wildly as monthly prices sometimes do, though there are clear seasonal changes. It’s not unusual for median sales prices to drop from springtime highs, but the drop this year in the median house price (the top blue line) has been somewhat longer and deeper than is usually the case: By November, it was $145,000 below the peak hit in April 2018.

Bay Area vs. U.S. Appreciation since 1987

The below chart based on S&P CoreLogic Case-Shiller data – which uses its own algorithm to measure home price appreciation instead of median sales price changes – compares real estate market cycles between the Bay Area and the United States over the past 30 years.

U.S. Comparative Home Values by City

One can buy approximately 14 median-priced 3-bedroom homes in Philadelphia, 10 in Houston, 4 in Miami or Portland, or 2 in Seattle, for the cost of one in San Francisco.

Bay Area Median Lot Sizes

Depending on the county or community, the amount of elbow room around your home – as measured by median lot size – also varies. Even the most expensive homes in San Francisco, costing $20m to $40m, often sit right next to each other. In other counties, at the upper price ranges, one sometimes gets rolling acreage or vineyards.

Bay Area Median Condo Prices & Appreciation

Sales Volumes by County

Bay Area Luxury Home Markets

There was no overall plunge in Bay Area luxury home sales this autumn: Year over year, sales ticked up about 6% in the 3-month period.

However, results varied by county: Santa Clara County – with more $3 million+ sales than any county in the state – saw a year-over-year decline of 14%. San Francisco luxury house sales were up 16%, but its luxury condo sales were flat. San Mateo was up 17%, Marin down 16%, Alameda and Contra Costa up 11%, and wine country luxury home sales increased by 26%. (Different price thresholds were used for the luxury designation depending on county.) These widely varying ups and downs muddy the picture of where the Bay Area luxury market is heading.

By a nose, San Francisco luxury condo sales top the list for highest average dollar per square foot values.

The Bay Area has a wide range of options in big, high-priced homes, with Atherton – recently designated the most expensive zip code in the country – and the neighborhoods of Pacific & Presidio Heights in San Francisco at the top of the price scale. (For those who don’t like yard work, there’s the option of a lavish penthouse condo or co-op in Russian Hill or South Beach.) There are homes or estates selling above $5 million – sometimes far above – in every county in the Bay Area, except Solano.

Supply & Demand Indicators

After 7 years of strong market recovery (or “up cycle”), there are preliminary signs of notable shifts in the market – but the magnitude of the changes vary considerably by statistic and by county. Though everyone wants to jump to definitive conclusions, it would be premature to confidently predict the course of a sustained, longer-term transition, if that is what is occurring. There are a lot of spinning plates in local, national and international economies and politics right now.

Listings vs. Sales

Though not especially high by historical standards, the overall supply of listings on the market has been appreciably increasing this autumn – to its highest level in 4 years (as charted below) – but sales volume in September-November 2018 was down about 12.5% on a year-over-year basis (not charted). That’s about 2000 fewer sales.

Generally speaking, during the recovery since 2012, an inadequate and often decreasing number of listings met increasing and sometimes feverish demand from buyers, adding immense upward pressure on home prices. For the time being at least, that pressure is now subsiding as the balance between supply and demand shifts.

Overbidding & Under-Bidding

As demand declines and inventory increases, the competition between buyers – and the need to overbid asking price to win the sale – subsides. Seasonality plays a big role in this statistic, and there are still many homes selling for over asking price, but the overall average Bay Area sales-price-to-original-list-price percentage has dropped below asking price – by a smidge – for the first time since January 2017.

Price Reductions

The dramatic increase in price reductions is a stark indicator of changes in the supply and demand dynamic. October saw a massive spike, but September and November numbers were also much higher than in the previous 6 years. Price reductions are a measure of the difference between buyer and seller expectations as to fair market value.

Expired & Withdrawn Listings – No Sale

The increase in listings taken off the market without selling – which jumped to about 2000 in November – is another indicator of disconnect between what sellers are willing to accept and buyers are willing to pay. Expired/withdrawn listings typically peak in December, so we may see a further increase next month. Many sellers who pull their homes off the market in November and December will try again next year.

Mixed Economic Indicators

Housing affordability is a huge social, political and market issue in the Bay Area. Though very low, current affordability percentages – as calculated by the CA Association of Realtors Affordability Index – are not quite as low as in 2007. (We cover affordability in a separate report.)

Bay Area Rents

Most economists expect to see something of a balance between what it costs to buy or to rent a home, but since 2015, rent increases have either moderated, or, in the case of San Francisco, rents have declined, while home prices and interest rates have increased substantially.

Employment

Since the last recession, the Bay Area has been one of the greatest job creating machines in the world. Unemployment rates are currently bumping along at historic lows.

Money, Money, Money

The astonishing amount of venture capital sloshing into the Bay Area affects the overall economic environment and its housing markets. When start-ups go public they can pour additional, immense quantities of new wealth into the pockets of founders, investors and employees – and then into the surrounding economy. Some major local unicorns have stated their intention to go public in 2019, though continued stock market volatility may affect those plans.

Local median household incomes have risen well above the national median. Among other factors, the people moving into the Bay Area tend to be more affluent than those moving out. (However, local poverty rates have also risen in recent years.)

Stock Prices

The S&P 500 saw an incredible surge in value from January 2016 through late September 2018 – rising about 50% – but its increase looks distinctly modest compared to the astounding share price movements of some of our local high-tech giants. Soaring stock values make people feel wealthier, more optimistic about the future, more willing to take on new debt, and more positive about buying new homes (and everything else). But when financial markets get volatile, sometimes seeing sudden, precipitous declines – as has occurred in recent months – buyers often become cautious.

Note that as of early December, financial markets have lurched up and down again since their late November lows, i.e. a queasy, high market volatility continues.

Interest Rates

Through spring 2018, home buyers appeared to shrug off concerns about rising interest rates, but that seems to be changing as rates continue to adversely affect affordability. Besides mortgage costs, increasing interest rates affect debt of all kinds, and whether private, corporate or governmental, debt levels around the world are generally at historic highs. High debt plus rising rates can be a dangerous economic indicator.

Population Growth & Migration

Increasing populations without a concomitant increase in new housing pressures rents and prices. Right now, California and Bay Area populations continue to grow, but at a reduced rate from recent years. Of course, population growth itself has both positive and negative economic and quality of living effects depending on the viewpoint.

The new U.S. Census state-to-state migration data for 2017 is illustrated below. Generally speaking, the Bay Area has followed state trends, i.e. more people moving out than moving in domestically, but that deficit more than made up by foreign immigration. Employment and/or cost of living issues, including housing affordability, are probably the dominant factors in these migration figures. It will be interesting to see whether the new 2018 federal tax law changes and the increasingly negative U.S. government attitude to immigration affect 2018 migration figures.

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.

San Francisco Real Estate Market Update: November 2018

market report

Midterms have passed and the Democrats have taken back control of the House, effective January 1st. It remains to be seen if they will attempt to reinstate full deductibility of homeowners’ mortgage interest, which could help keep San Francisco home prices trending upwards.

Over the past four weeks, the stock market has had significant gyrations, including a 1200 point decline in the last two weeks of October which capped that month’s worst performance in seven years. This volatility may negatively impact buyers who depend on stocks for their downpayment.

The economy remains robust and the Federal Reserve Bank is expected to continue raising interest rates to keep it from overheating, resulting in inflation. These rises will be a counterweight to rising home prices because rising interest rates dampen buyers’ purchasing power.

In San Francisco, inventory rose very slightly from last year for both single family homes and condo/loft/TICs, but the market remains very solidly in the sellers’ drivers seat.

Single Family Homes:

  • The three-month rolling average median sales price of $1,550,000 is up 8.8% over last year’s*.
  • Year-to-date, new listings are up 5.1% while sales are down 1.5%.
  • October’s inventory of 2.5 months is 13.6% higher than in 2017.
  • 82% of homes sold over their list price and the median percent of list price received was 113%.

Condo/Loft/TIC’s:

  • The three-month rolling average median sales price of $1,199,633 is up 6.2% over last year’s*.
  • Year-to-date, new listings are up 5.6% while sales are up 7.7%.
  • October’s inventory of 3 months is 3.4% higher than in 2017.
  • 68% of condo/loft/TIC’s sold over their list price and the median percent of list price received was 106%.

Southern/Central Marin County Real Estate Report October 2018

investsfkw

SF Unicorn IPOs

  • Five San Francisco-based tech “unicorns” are planning on going public in 2019
  • Uber, AirBNB, Stripe, Pinterest, and Lyft
  • Once they have their IPOs, their employees will likely take their cash windfalls and purchase homes in and around San Francisco, driving sales prices even higher

The Beige Book

  • More strong economic news came from the Federal Reserve Bank’s September
  • Beige Book economic report which shows continuing strong job and wage growth in the San Francisco region
  • It notes that the real estate market activity has continued to expand, in spite of higher interest rates, and the low inventory coupled with strong demand pushed prices and rents higher

Measure of CEO Confidence

  • The Conference Board’s Measure of CEO Confidence, which had slipped in the
    second quarter, declined again in the third quarter
  • This report is a window into planned capital spending, expansion and hiring, all of which can have a significant impact on jobs and hence home-purchasing demand
  • Yet it may not reflect the more bullish, expansionary tech sector dominating San Francisco’s economy

San Francisco Real Estate Market Update: October 2018

market report

SF Unicorn IPOs

  • Five San Francisco-based tech “unicorns” are planning on going public in 2019
  • Uber, AirBNB, Stripe, Pinterest, and Lyft
  • Once they have their IPOs, their employees will likely take their cash windfalls and purchase homes in and around San Francisco, driving sales prices even higher

The Beige Book

  • More strong economic news came from the Federal Reserve Bank’s September Beige Book economic report which shows continuing strong job and wage growth in the San Francisco region
  • It notes that the real estate market activity has continued to expand, in spite of higher interest rates, and the low inventory coupled with strong demand pushed prices and rents higher

Measure of CEO Confidence

  • The Conference Board’s Measure of CEO Confidence, which had slipped in the second quarter, declined again in the third quarter
  • This report is a window into planned capital spending, expansion and hiring, all of which can have a significant impact on jobs and hence home-purchasing demand
  • Yet it may not reflect the more bullish, expansionary tech sector dominating San Francisco’s economy