News & Research Archive

Pulse Of The Market (Pulse 60 - Turning 60)

Jun 09, 2008

 

Turning 60 - the Pulse, not me. This being my 60th Pulse, I thought I would use the occasion to reflect a bit on some of the residential real estate changes that have occurred in San Francisco since Pulse 1, dated November 2001.

The Way it was

On a macro-economic basis, the world is quite different in June 2008 than November 2001.

In 2001 oil was about $25.00 per barrel, up from less than $20.00 a barrel during the years 1997 – 2000. On May 30, 2008, it closed at $127.00+/barrel.

The Dow Jones Average closed at 12,638 on May 30, 2008 up from a 10,021 close on October 1, 2001, an increase of 26.1% for the 7+-year period.

Meanwhile the average sale price of a San Francisco condominium increased from $615,806 in 2001 to $893,530 in 2007 (a 45.1% increase) while the average price of a single-family home increased from $751,361 in 2001 to $1,205,050 in 2007, an increase of 60.4%.

The relationship is interesting. In 2001 the average single-family home sold for 22% more than the average condominium; in 2007, a single-family home sold for 35% more than a condominium! Why? Because single-family homes are dearer today than yesteryear. There is virtually no more land in San Francisco where you can build out instead of up. Hence, no more single-family homes are built, while many new condominiums are being built (up).

Yet no where has the change in seven years been more dramatic than in the residential market south of Market St. (SOMA), one of my favorite subjects.

Take a look at the first map. These are the ‘major’ condominium developments that existed in SOMA by the end of 2001. There are only 12 developments, including the first two of three towers a 219 & 229 Brannan, which are shown as one - The Brannan.

Now take a look at the next two maps that are updated as of June 2008. There are a total of 35 buildings that have been completed and units are now re-selling. There are another 21 developments where construction has been completed but all units have not yet been sold. And another 12 developments that have been approved by the City although construction has not yet started.

All together, we have 56 existing developments (not including the approved) with 8,548 units, versus 12 buildings at the end of 2001 that have a combined 1,186 units. My how the landscape has changed in 7+ years!

Who would have predicted in 2001 that SOMA would have changed as much as it has or that oil would be $127.00+ per barrel? And who would have predicted that high-end buyers would embrace the south of Market neighborhoods?

In 2001, 92% (57 out of 62) of all condominium (including co-ops + loft condos) sales at $1,500,000 or more occurred in Districts 7 & 8 (Pacific & Presidio Heights, Cow Hollow and the Marina: Nob, Russian & Telegraph Hill, North Beach and the Financial District). In 2007 there were a total of 197 sales at $1.5 million or more, and 134 (68%) of them occurred in Districts 7 & 8, while 28 (14%) occurred in the SOMA neighborhoods. Through May 31, this percentage is up to 19+%. In this seven-year period an increasing percentage of upper-end buyers have been willing to place their money in SOMA neighborhoods.

Predicting the Future

I have no idea where the price of oil will be in 2015, nor which of the City-approved developments will be built. Predicting is inherently risky. However, I am confident in identifying powerful ongoing trends and their trajectories.

First, single-family homes will continue to appreciate faster than condominiums, and the percent spread between these two categories will widen over time. With more condominiums being built, and no single-family home construction, when considered within the context of increasing population, the increased demand will continue to push single-family home prices higher and widen the gap with condominiums.

Second, not all the red triangle sites on the attached maps will get built. Some developers will sell their approved sites, and others will step in and take their place. The 2015 maps will look more dense than the 2008 maps. Re-urbanization is in full swing in San Francisco and other major cities throughout the nation, and it will not be reversed, at least for a long time.

Before we conclude that single-family homes are the better investment in San Francisco, there are a couple of other factors to consider.

“Following World War II, the Eisenhower administration passed through Congress the Interstate Highway Act of 1956, which laid out plans to build over 41,000 miles of interstate highways that increased the dominance of the automobile. This led to ‘urban sprawl’, caused the spatial structure of U.S. metropolitan areas to become horizontally structured, and contributed to the economic, spatial and cultural decline of American urban centers.........Automobiles have replaced people as objects of interaction. In many communities, our external environment allows for human interaction insofar as we walk from the vast suburban parking lots to the big-box stores that they support.” *

Guess what? The interstate system worked all too well. Now commuting times are off the charts, more and
more productivity time is being lost, and the upward cost spiral of oil is squeezing peoples’ pocketbooks. While single-family homes may ostensibly be the ‘better investment,’ life is not all about the better investment. Many people prefer WALKING to shops, entertainment, neighbors, markets, etc. A certain segment of the population also wants the enhanced security offered by condominiums, fitness facilities, and doormen and/or concierges.

We will continue to go vertical, folks, and this trend will be with us for quite awhile – not hard to predict! Regardless of what happens with the future price of oil or the Dow Jones average, there are a few things that do not go out of style. For real estate, these are prime locations, amenities, and quality of construction.

*Note: Cited from Economic History of the United States 375 (Andrew Armbruster and Dr. David Crary) 2005.

Written by: Malcolm E.A. Kaufman

E-mail: mkaufman@mcguire.com


Starboard TCN is posting this article on its website and blog with Malcolm E.A. Kaufman's approval.

Malcolm E.A. Kaufman is Top Producer at McGuire Partner. He refers you to his website, http://www.sfpulseofthemarket.com/, where you can see recent issues of Pulse of the Market© and learn more about him. He invites your comments, suggestions, and questions.

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