San Francisco: City Moves

After the wild ride of recent years, it may be hard to remember exactly what "normal" is in the San Francisco Bay area housing market. Let's take a refresher course. Before the dot-com bubble, the mature Bay area economy typically produced additional jobs at a fairly modest pace. Total housing production was limited, too, constrained not just by the relatively slow household growth rate but also by some of the nation's most extreme barriers to new building in terms of land availability and especially development costs. From that perspective, the region certainly appears to be entering a period when the housing market performance is returning to the long-term patterns seen historically.

Still, evolution of the Bay area housing scene is easy to spot. In one of the most notable trends, multifamily homes are playing an increasingly important role. The region isn't experiencing the run-up in single-family home construction seen in most other parts of the country. In fact, while building authorizations in the single-family sector dropped 11 percent in the 12 months ending March 2005, multifamily starts jumped 20 percent, with apartments and condominiums now accounting for nearly half of ongoing total housing development. There's just not enough land available in the Bay area for single-family building to reach especially large volumes, and furthermore, much of the population can't afford the region's high single-family home prices.

Evolution also is occurring in the character of the Bay area's multifamily housing product. Many of the projects under way are condominiums, with the East Bay town of Emeryville providing a good illustration of the region's condo mania. For apartments, the big story is transit-oriented development. Several high-density properties that combine apartments and retail space within steps of a rail stop are in the works, and more than half of the region's apartment construction actually is occurring no more than a few miles from a mass transit station.

After the Gold Rush

Employment in the San Francisco, Oakland, and San Jose metros totaled just more than 2.8 million jobs as of spring 2005. That figure is down roughly 460,000 jobs from its 2000 peak, but the good news is that growth has returned, with about 3,000 jobs added in the past year. The tech and finance sectors that form so much of the total employment base are expanding modestly and appear to be positioned for stronger growth. Overall economic expansion, however, is held back from a healthier rate by an ailing government sector, particularly local school districts which must cut significant jobs to balance their budgets. Most economists are forecasting total employment growth in the Bay area to pick up appreciably to some 35,000 to 45,000 jobs by late 2005 to early 2006.

CABLE CAR CULTURE: Commuters who live in San Francisco will be increasingly relying on mass transit.

Meanwhile, San Francisco Bay area apartment occupancy has been inching upward for more than two years. The spring 2005 occupancy rate reached 96.3 percent, up 2.4 points from the bottom performance of just less than 94 percent in 2003. While occupancy reached 98 percent during the late 1990s-early 2001 frenzy, today's 96.3 percent occupancy rate actually is within a percentage point of full occupancy by long-term historical standards.

Rents, on the other hand, still have a way to go. The typical apartment community in the Bay area suffered a 35 percent cut in effective rents between 2001 and the end of 2004, before rates began eking up in 2005. Still, the year-over-year increase as of spring 2005 was less than 1 percent. Average rents now stand at $1,341 per month, or $1.624 per square foot.

With Bay area apartment occupancy tightening, the region should be positioned to experience strong rent growth once again, assuming that single-family home values remain astronomical. During the same time as apartment rents faltered by 35 percent, the median price of a single-family home shot up 42 percent and now stands at $656,700, according to the National Association of Realtors. This makes the premium to buy versus rent housing in San Francisco one of the steepest in the country.

San Francisco's urban core has led the comeback for the Bay area apartment market. Occupancy has climbed to 97.4 percent in the SoMa (South of Market) district and 96.3 percent in the Marina/North Beach/downtown zone. Furthermore, these two locales already are experiencing meaningful rent inflation, with effective rates up about 4 percent on an annualized basis as of spring 2005. Desirable lifestyle characteristics have made a big impact on the performances in these neighborhoods, which were able to attract renters from other portions of the region as for-lease options became more affordable in recent years.

Next Stop: Transit

Now that more people have jobs in the Bay area, the region's highways are again growing congested. The Census Bureau reports that San Francisco's average commute time, at nearly 29 minutes, is the ninth-longest in the nation, and the situation isn't much better in Oakland or San Jose. Throw in that California has the country's highest gasoline prices and worsening air quality issues, and Northern California residents are in a no-win situation virtually every rush hour. Not surprisingly, apartment developers and city planners are working to add high-density housing that's convenient to the region's extensive mass transit system. About 3,700 of the 7,300 apartments under construction in the San Francisco area in spring 2005 are being built on sites within two miles of a BART (Bay Area Rapid Transportation) or Caltrain station.

The biggest concentration of "smart growth" projects lies along BART's San Francisco International Airport extension, which stretches between the California cities of Colma and Millbrae. At the Colma station, local builder JSM Enterprises is putting the finishing touches on La Terrazza, a $35 million property that features 153 apartments and 3,500 square feet of ground floor retail space. At the next stop–South San Francisco station–Solaire is another transit village, this time built atop the BART facility's parking lot. San Diego-based Fairfield Properties plans to finish Solaire, which will include 360 apartments, a 16,000-square foot grocery store, and two parking decks, in summer 2006.

The Crossing at San Bruno, located within walking distance of both BART and Caltrain stations, is the region's most ambitious transit-oriented development. Plans call for nearly 1,000 apartments, a 228-unit senior housing complex, a 500-room hotel, and possibly office and retail space. The first phase of development is the 300-unit apartment community Meridian at the Crossing, a joint effort from Regis Homes of Northern California and TMG Partners. Just opened, this $68.7 million property boasts an array of common-area amenities that include a heated swimming pool with retract-able roof. The next phase of apartments will be called Paragon at the Crossing, and groundbreaking is scheduled for 2006.

Condo Appeal

Condominiums, which have been a key part of the downtown San Francisco housing mix, now are hot throughout the Bay area. It's easy to understand why. First and foremost, condos cost 20 percent to 25 percent less than the typical single-family home, according to the California Association of Realtors, making condos the only for-sale housing that many households can afford. Further-more, most single-family home construction has been pushed to the region's fringes, so condos usually are more convenient to job centers and cultural or entertainment attractions.

One of the most notable new condo markets is Emeryville, which is sandwiched between the University of California-Berkeley area and downtown Oakland. In a process that's still ongoing, years of repositioning efforts have transformed this once gritty, industrial town into a new-economy business hub that includes employers like Pixar Animation Studios, software maker Siebel Systems, and biotech company Chiron.

Residential development is in high gear, too. More than 1,000 condominiums are found in 14 separate developments that are either just completed or under construction. Five additional communities where construction should kick off by the end of 2005 are reported on the drawing board, which will make for quite a makeover for Emeryville, a town limited to just 1.2 square miles in total size.

Michigan-based Pulte Homes has been particularly active in Emeryville. The firm hit a home run with its first project in the market–Liquid Sugar, a 55-unit condo development built on the site of a former corn syrup plant. Pulte followed up with the equally successful Elevation 22. Pulte's third community is the 92-unit City Limits, which is already 60 percent sold out. It's appropriately named: City Limits straddles the Emeryville/Oakland border.

With momentum accelerating, Pulte has been able to substantially bump its Emeryville condo prices. "In general, from when we opened Liquid Sugar to where we are today at City Limits, comparable unit pricing has increased about 35 percent, or about $150,000 a unit," says Steve Kalmbach, Northern California division president at Pulte Homes. "This jump was due to the success of Liquid Sugar, the quality of the design, and, in general, how well the units were received by our buyers." Pushing even higher, Pulte has set tentative pricing at around $500,000 to the high $600,000s for Glashaus, a 140-unit property that the company expects to start in late 2005 at the corner of 65th and Hollis Streets.

Room for Rent Hikes

Overall, though, the Bay area housing market is exhibiting trends that are slightly different from the rest of the country. While construction is up for both the apartment and condominium sectors, a slowdown in single-family home deliveries means that totalhousing production is not particularly worrisome–especially if new job creation happens at the level most economists expect. Look for San Francisco to rank near the top of the list of the nation's apartment occupancy leaders for the near term, while occupancy in Oakland and San Jose should at least hold steady.

The outlook for rent achievement appears promising, too. Though it's unreasonable to expect rates to return to their early-2001 high anytime soon, the return of rent growth well above the national norm certainly should be within grasp. Even if single-family home prices dipped, there's still ample room for rents to increase. The Bay area, then, should join places like the Florida markets, Southern California, Austin, Seattle, and Las Vegas among the country's rental revenue growth leaders in the immediate future.

Good News

Despite protestations that mixed-income multifamily developments reduce property values, a new study from the Massachusetts Institute of Technology's Center for Real Estate shows that there's no significant difference in home-price appreciation between residences located close to a mixed-income development or elsewhere in the community.

The study, "Effects of Mixed-Income, Multi-Family Rental Housing Developments on Single-Family Housing Values," looked at seven such developments in the Boston suburbs. The results effectively disarm one commonly used weapon in the fight against higher-density, affordable housing projects. "We were extra-meticulous in our research because this is such a hot-button issue," says Henry Pollakowski, a housing economist at MIT's Center for Real Estate and the study's co-author. "We talked to planners, tax assessors, and neighbors, as well as looking at patterns over time for the price comparison."

Columbia Estates

Developers are happy to have proof of what they've been claiming all along. "I'm not at all surprised by the findings," says Mark Huppert, principal with Seattle's Catapult Community Developers. "The reality is that new multifamily housing–when appropriately designed to accommodate a retail, pedestrian, and neighborhood orientation–can in fact enhance the sense of activity and services. This report will serve as a tool for getting potential opponents to the table and will open up lines of communication before opposition can be formed."

–Margot Carmichael Lester

To read the study, visit http://web.mit.edu/cre/research/hai/40b.html.

STAT TO WATCH

Another indicator of a light at the end of the rental-market tunnel: For the first time since 2001, apartment absorptions were positive in the first quarter of the year. (In 2004, nearly 18,000 apartments opened up during that same time frame.)

According to Reis, nationwide multifamily absorptions increased to 8,627 units in the first quarter of 2005. That means absorptions have totaled nearly 80,000 in the past 12 months. That's the highest such figure in three and a half years, notes the National Multi Housing Council.

Jesse Glasgold, an analyst with Reis in New York, says he is also seeing decreasing vacancy rates and increasing rent costs moving in parallel with the positive absorptions. David Woodward, CEO and managing partner of Chicago-based Laramar Group, observed that his firm has started "to see occupancy tighten up and concessions burn off in some markets, but it's very, very gradual."

It's speculative, though, to correlate these positive apartment absorption numbers with any potential anxiety about buying real estate in a so-called housing bubble, says Richard Levy, a research analyst at NMHC. "People may make [rent versus buy] decisions based on group effects," he says, "but there are also more tangible things that are more quantifiable, like [attractive] interest rates."

Interestingly, for the trailing four quarters, the number of multifamily completions decreased, to fewer than 88,000. It's the first time in four years that completions and absorptions have achieved that kind of parity.

–Amy Rogers Nazarov

FAST FACTS

Considering the San Francisco market? Here's what you need to know:

1. Population: 776,733
2. Occupancy: 96.7%
3. Median Age: 36.5 years
4. Median Household Income: $55,221
5. Average Rent: $1,524/month
6. Unemployment: 4.9%

Notable: Approximately 65 percent of San Francisco residents live in rental structures–nearly twice the national norm; maximum speed for a BART train is 80 mph; oldest building in San Francisco is Mission Dolores, built in 1791