The Registry



In San Francisco Supply and Demand Dynamics Favor Condo Developers

By Joe Gose

High housing demand fueled by extraordinary job creation and low interest rates, combined with lagging construction and a precarious entitlement process, have put San Francisco condominium developers on a lucrative path.

San Francisco SoMa The Registry real estate“We see demand increasing rapidly because of all the economic growth in the Bay Area,” said Paul Zeger, president of San Francisco-based Polaris Pacific, a residential sales, marketing and research firm focused on the West Coast. “But we’re undersupplying the market, which means that over the long term in San Francisco, and in the Bay Area in general, you’re going to see housing values go up.”

It’s hard to argue with that premise considering the Bay Area’s economic engine. Employers in San Francisco County created nearly 40,000 jobs from early 2012 to March 2013, according to the most current data available from the economic analysis division of San Francisco’s Office of the Controller.

Those numbers suggest that developers should be adding some 10,000 total housing units or more a year in San Francisco, Zeger said, but delivery is falling well short.

While contractors are building several thousand residential units throughout the city, delivery will span the next 24 months or so. Additionally, developers have shown a clear preference for rental units, which have been easier to finance over the past few years.

Nearly 5,000 apartments are under construction in San Francisco and an additional 2,900 have been approved, according to Polaris Pacific. By comparison, some 2,200 condo units are under construction, and most of those deliveries are back loaded into the second half of 2015. Completion of Tishman Speyer’s 655-unit Lumina high-rise development in South Beach is expected midway through 2015, for example.

While the city has approved an additional 3,900 condo units, several projects are still under consideration, and it will be years before they begin to impact the market. And only about 10 percent of units in the rental pipeline are likely to convert to condo, Zeger predicted.

The decision last month by San Francisco to reject 8 Washington, he added, has made developers uneasy and could dissuade some from moving forward. The project, a 134-unit luxury condo that the city approved in 2012 along with a variance to exceed the waterfront height limit by 52 feet, has been in the works for more than seven years.

“We’re not seeing a flood of condos coming into the market,” he said.

Yet developers taking the risk stand to make a tidy profit. The median price for a home in San Francisco climbed 10.8 percent to $830,000 in October from the previous year, and the average time on the market decreased 29.7 percent to 36 days over the same period, according to Polaris Pacific.

By one measure, Class A high-rise developers are fetching an average of $1,100 a square foot, well above the benchmark of $850 a square foot to justify construction, Zeger said. Developers of mid-rise condos, meanwhile, are receiving more than $650 a square foot, which is the benchmark for that product. The Artani, George McNabb’s 52-unit project in the Van Ness/Civic Center neighborhood, brought average prices ranging from $674 a square foot to $759 a square foot, depending on the size of the unit, according to Polaris Pacific.

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