By Meghan Hall
Historically, the Bay Area’s condominium market has been incredibly strong; limited for-sale development, combined with explosive commercial growth, has put pressure on the market. While the first few months of 2020 saw a more stable start to the year for the regional condominium market, sales activity has slowed significantly over the past month, according to a recent report released by Polaris Pacific. The reports, which covered the San Francisco, Oakland/Emeryville and Silicon Valley markets, saw the number of transactions decrease dramatically as the impact of COVID-19 on the commercial real estate market takes effect.
“The market was in relatively good shape entering the year, across the board,” explained Managing Principal at Polaris Pacific, Garrett Frakes. “The Oakland/Emeryville, San Francisco and Silicon Valley markets tend to track each other pretty closely, and the correlation between those three markets is definitely solid. [At the beginning of the year], there was no over-supply, there was reasonably good demand, inventory was moving. I think it was kind of a Goldie Locks market; it wasn’t too hot. It wasn’t too cold.”
Over the course of the past economic cycle and prior to COVID-19, all three areas have been sellers’ markets. Polaris states that it measures supply and demand imbalances by months of remaining inventory. Six months is considered a “balanced” market, while the three-month mark is considered “oversupplied.” In April, San Francisco had 2.9 months of remaining inventory, while Oakland/Emeryville had 1.2 months, and Silicon Valley had 4.5 months.
San Francisco has one of the tightest condominium submarkets in the nation. Condominium development in the submarket has been largely overshadowed by apartment projects, meaning that new for-sale product was tough to find. Polaris Pacific found that even prior to COVID-19, condominium resales were declining in San Francisco. Between January and March, there were 386 sales, a 37.5 percent decrease from 2019. During April, sales dropped 65.6 percent due to concerns regarding COVID-19, states Polaris Pacific. Additionally, there are 846 unsold new condominiums on the market, an 85.9 percent increase from last year.
Two markets in the East Bay—Oakland and Emeryville—saw the sharpest decrease in condominium sales volume in April. While the number of sales at the beginning of the year through the end of March increased 5.4 percent to 176 transactions, indicating a positive start, transactions slowed significantly in April. The month saw just nine transactions, an 89.4 percent decrease over the same period of time last year.
The Silicon Valley condominium market, however, saw almost as sharp a decrease as Oakland and Emeryville. According to Polaris Pacific, there were 65 closings, an 87.8 percent decrease in April. Between January and March, there were 839 sales of existing condominiums, already a 17.2 percent decrease from the previous year.
Polaris Pacific also notes that the Silicon Valley market saw a median price decrease in April of 9.7 percent when compared with 2019, bringing the median condominium price to $795,000. And, while San Francisco and Oakland/Emeryville recorded price increases—the median price in the two markets rose 2.6 percent to $1.23 million and 9.2 percent to $650,000, respectively—Polaris Pacific suspects that price corrections in the remaining markets will follow suit in the near future.
“If you have sales volumes drop in the market, which is nothing more than a drop in demand, then pricing, by definition, must follow,” stated Frakes. “This economic adjustment will definitely effect demand.”
The increase in prices recorded by Polaris Pacific in the report in the San Francisco and Oakland/Emeryville markets is largely due transactions that entered in to contract before the impacts of COVID-19 became clear.
“Everything that closed in April was put into contract in the February to early March period…but I don’t think [those increases] are reality,” said Frakes.
However, Frakes also notes that despite the challenges posed by COVID-19, interested parties are still moving forward with transactions. Polaris Pacific estimates that they have done about $35 million in contracts over the past ten days.
“If you have a motivated buyer and a motivated seller, then a deal is going to get done,” Frakes added.
Polaris Pacific has also noticed that those who walked away from transactions as COVID-19 was taking root are beginning to come back to the market, and sellers who are eager to dispose of a property are becoming more flexible, and working with buyers to get deals to close.
And, while economic and housing fundamentals were strong at the beginning of the year, Frakes also emphasized that deals will still close simply because people will always have a need for housing, and the decision to buy is often informed by life decisions.
“…We tend to talk about housing fundamentals in this commoditized language,” said Frakes. “Housing fundamentals are definitely economic, but they’re also driven by need. Those needs haven’t gone away. They haven’t changed. Life goes on, even in a pandemic. These life decisions that drive housing decisions still go on, and it is at least additive to the issue of the economy.”