The SF Planning Department
just released updated Q4 2015 information regarding the new-housing development
pipeline. San Francisco is in the midst of one of its biggest new-housing
construction booms in history. (The same is occurring on the commercial
development side, but this report won’t deal with that.) Indeed, it often seems
that new projects of one kind or another are being announced on an almost daily
basis, and a detailed map delineating all projects in some stage of the
pipeline makes many city districts appear to have measles.
New housing construction has
lagged population pressures for decades – pressures which have soared during
the current economic and employment boom – and now there is a scramble to
address the inadequacy of housing supply, and, for developers/investors, to
reap the rewards of a high demand/low supply dynamic in one of the most
affluent and expensive housing markets in the world. Of course, one of the questions now is at what point might new inventory succeed in fully meeting market-rate buyer and renter demand, and possibly proceed to an over-saturation point, thus significantly changing the supply and demand dynamic. Such a change, if it arrives, would certainly affect rent and price appreciation rates.
As of December 30th,
there were approximately 62,000 housing units of all kinds – luxury condos,
rental apartments, market rate and affordable units, and social project housing
– in the relatively near-term pipeline (next 1 to 6 years). Most are in the
Market Street corridor area, the Van Ness corridor above Market Street,
and in the districts to the southeast of Market Street (see map). If we add the
mega-projects planned for Candlestick-Hunter’s Point, Treasure Island and Park
Merced, which may take decades to become a reality, the number jumps to well over
80,000. As a point of context, there are approximately 382,000 residential
units in San Francisco currently. About 3500 new units were added in 2014 and about 2500 in 2015.
Housing supply and
affordability issues, strong feelings about neighborhood gentrification and tenants’ rights, and even
simple NIMBYism (or in SF, NBMVism, “not blocking my view!”) make development
the most contentious political topic in San Francisco. Furious
battles are ongoing in the Board of Supervisors, the Mayor’s office and the
Planning Department; with neighborhood associations and special interest
groups; and at the ballot box. Development is not for the faint of heart or
shallow of pocket: One cannot contemplate building virtually anything in the
city without vehement opposition and sometimes a well-funded coalition
in opposition. For
developers, the equation to be calculated out includes very high land and construction costs, increasing affordable-housing contributions required by the city, enormous hassle-factor
and extended project timelines on one side, and the potential for financial returns on the other. In new San Francisco developments, condos often
sell for $1250 per square foot and above, but we are hearing from people on the development side that they can no longer pencil out building new housing in the city in a way that makes financial sense. They believe that many of the projects in the pipeline probably will not actually be built, and thus the numbers quoted above are greatly overstated.
Of the units in the greater
pipeline of 80,000 units, over 9000 units are designated as “affordable
housing” – but many of those are in the long-term Candlestick-Hunter’s
Point and Treasure Island projects. Because of the nature of the political
environment, much to do with how much affordable housing will be built is in
flux. Many developers are in intense negotiations with government agencies and
neighborhood associations to find a workable compromise between return on investment
on one hand, and unit mix and affordable housing requirements on the other.
Said requirements may consist of a percentage of units in the project, building
affordable units elsewhere
in the city, or contributing substantial amounts to the city’s affordable
housing fund in lieu of building.
In early March 2016, the San Francisco Board of Supervisors voted to put a city charter amendment on the June ballot, which, if passed, would hugely increase the affordable-housing contributions (in money or in affordable units built) required of developers of projects of 25+ units. Obviously, this would affect the financial equation for builders in the city. The question is will it affect their motivation to build so much as to significantly impact new home construction (market rate and
affordable) in San Francisco. If you are interested, the city's chief economist, Ted Egan, wrote a detailed report on the issue: Economic Impact
New housing construction is
very sensitive to major economic, political and even environmental events (i.e.
natural disasters), so simply because something is in the pipeline doesn’t mean
it will be completed as planned within the time frame contemplated. First of
all, plans are constantly
changed just in the normal course of things. And if a big financial or real estate market correction (or crash) occurs,
as happened in late 2008, projects in process can come to a grinding halt, and
new projects substantially altered, delayed or abandoned. Because the timeline
in San Francisco can run 3 to 6+ years from initial filing with Planning to
construction completion, developers and their lenders make enormous financial
bets on what the future will look like. Timing is everything in real estate
development, and can make the difference between large profits and bankruptcy.
When the music stops – which it always does sooner or later, though the time
range of opportunity can vary greatly – not everyone will find a chair to sit
down in. That especially applies to those who over-leveraged their projects.
As a side note, big Chinese
developers have been investing in both large residential and commercial real
estate development projects in the Bay Area, and, according to reports,
continue to aggressively seek additional opportunities. Though significant –
constituting billions of dollars in investment – these projects do not
constitute the greater part of Bay Area development.
Department Pipeline Report
Other reports you might find interesting can be found here:
30+ Years of San
Francisco Real Estate Cycles
were made in good faith with data from sources deemed reliable, but they may
contain errors and are subject to revision. Statistics are generalities and all
numbers should be considered approximate.
© 2016 Paragon Real Estate Group