News & Research Archive

Housing Market Effects On Commercial Market

Aug 28, 2006

 

A Housing Market Slide Would Effect the Commercial Real Estate Market

 

Coming out of the 1980s office-building boom, San Francisco office space vacancy rates exceeded 20%. Between 1990 and 1998 (the start of the dot-com market boom), San Francisco experienced virtually no new construction of office space and saw an average of 600,000–800,000 square feet of positive absorption of office space per year, lowering the vacancy rate to 12% by 1998. After the dot-com bust in 2001, the vacancy rate exceeded 20%. Five years later, the vacancy rate is back down to near 12%. The absorption rate averaged 600,000–800,000 square feet between 2002 and 2004. In 2005, San Francisco saw a near record absorption of office space of over 2 million square feet. In other words, the San Francisco housing market is facing a slide.

 

Vacancy rates fall on the basis of two things: jobs growth or a reduction of inventory due to conversion to another use. Roughly 1.2 million square feet of absorption occurred last year because of office space conversion to housing, specifically condo conversion. An estimated 31,000 condo permits were issued either in review or for projects scheduled to be built over the next three to five years. Using the industry standard of 1.5 residents per unit, more than 46,000 new residents would have to fill these units to create a positive absorption in housing.

 

San Francisco hit a population high in the early 1960s, topping out at 810,000 residents. In the early 1970s, we hit the lowest point since World War II at 695,000. Today we are at 735,000 residents. This figure has been steady for the past ten years. To achieve a positive absorption in housing, San Francisco’s overall population would have to grow to 780,000 in the next three years.

 

This would be welcome news to office market landlords, and would suggest increased job growth to support more need for office space in general. Landlords anticipating this increase in population have raised rental rates over 15% so far this year. Some landlords have decided to wait to raise rates, anticipating that rental rates will skyrocket in a few years, given that little development is planned hit the office market, particularly in the Class B and C marketplaces.

 

But what if the housing slide is not short-term? San Francisco could see a renewed downward cycle that could impact both the housing and the office market. A housing slide would create less demand for new residential condos. (Some developers have already slowed their construction plans or stopped them altogether.) Developers might reconvert residential projects back to office—this is already occurring at a project on 2nd and Mission streets.

 

A housing slide would also lead to the elimination of jobs. Mortgage brokerage firms, title companies, residential real estate offices, architects, construction firms, and banks all would suffer during a housing slide; they would face the need to retrench.

 

Most residential brokers feel that the market is not in a slide but is leveling off to a realistic level after explosive growth. That may be, but what will happen when the influx of new condos hits in 2007—will the buyers be there?

 

The federal government may hold the key to this question in terms of its decision to raise or lower interest rates. In the fed’s most recent session, it voted not to increase interest rates for the first time in months; some economists are now predicting that we might see interest rate reductions in early 2007 even with inflation fears due to oil price increases. Some people believe the feds will choose to boost the economy to maintain job growth over inflation fears. Real estate markets such that in as San Francisco sure hope so.

 

 

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Written by: Hans Hansson

E-mail: hans@starboardnet.com


Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 21 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email hans@starboardnet.com or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.

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