By David Goll
Breathtaking rents hitting dizzying levels in soaring San Francisco residential towers have made even buying a home a cheaper monthly alternative in one of the nation’s most expensive housing markets.
That is if you can afford an equally staggering down payment.
In an economically thriving city that has long pursued a go-slow approach to building new housing — leading to demand far exceeding supply — real estate professionals are hoping thousands of new rental and for-sale properties currently under construction or in the planning pipeline can ease the housing crunch.
There are nearly 2,700 for-sale condominiums that have recently been completed, are under construction or in the planning pipeline in downtown San Francisco and surrounding districts. Another 6,800 rental apartment units are planned or underway in the South of Market and Mission Bay districts.
Some of the largest condo developments are the 42-story, 656-unit Lumina project by Tishman Speyer Properties to be completed next year; the 21-story, 350-unit Mission Bay Block 1 project scheduled for a 2017 opening; and the 40-story, 350-unit Transbay Block 1 tower planned by Tishman Speyer that will rise by 2018 at the earliest. On the rental side, the 57-story, 574-unit Transbay Block 8 being developed by Related California is planned for a 2017 opening, while the 43-story, 563-unit SOM Tower being built by Essex Property Corp. is scheduled to debut the same year. Same for 1 Henry Adams, a six-story, 560-unit structure by Equity Residential Co. Ltd., also in the SOMA neighborhood.
City officials and leasing agents are hoping the new housing will have an impact on rents that are reaching historic highs. The average rent for a one-bedroom unit at the 49-story Tower Two at One Rincon Hill is $4,476, according to Eastdil Secured, a New York-based real estate investment banking company and broker for the Rincon Hill project. The average purchase price of a one-bedroom, 1,500-square-foot dwelling in San Francisco is $1,182,500, or a monthly mortgage payment of $5,143.
However, when tax benefits kick in, that monthly figure drops to $3,762, according to Eastdil Secured.
But even at a minimal 20 percent down payment, that same one-bedroom home in the sky would require a down payment exceeding $200,000. In the experience of Alan Mark of The Mark Company, a San Francisco-based real estate sales and marketing firm, the rent vs. buy contest works best for the latter when homes are priced below $1 million.
Even in San Francisco there is still wide a variation in prices. In September, median condo prices ranged from $725,000 in the Diamond Heights district to $1,650,000 on Russian Hill. For single-family homes, the median price range widened from $675,000 in Bayview/Hunters Point to $7,275,000 in Pacific Heights.
Condo prices slipped a bit in September, declining 3 percent as compared to August, according to data compiled by The Mark Company. But prices were still 15 percent above September 2014. The inventory of 656 new condos on the market in San Francisco last month was the lowest number since March.
“If you can put 20 percent down, and factor in low interest rates and tax benefits, it’s going to come out less to own than rent on a monthly basis,” Mark said. “As prices rise, it depends on the size of a down payment.”
During the fall meeting of the Urban Land Institute, Mark said he and other real estate agents toured a one-bedroom unit with monthly rent of $3,950. For comparably sized dwelling selling for $975,000, a buyer would save $1,300 monthly, he said.
Despite the prices, according to Mark and others, the pool of buyers interested in diving into San Francisco’s supply of new and existing housing is growing.
“Since the market started taking off in 2012, we’re seeing more interest in buying than ever before,” said Mark Colwell, agent for Redfin Corp. “It has become an unstoppable freight train.”
Though one of the prevailing narratives in the “unreal estate” market of San Francisco and the Bay Area is prices are soaring thanks to foreign buyers offering suitcases of cash so they can score trophy properties, Colwell said that phenomenon is exaggerated. The reality is “a bit more boring,” he said, adding most buyers are locals.
“It’s doctors, lawyers, people who work in high-tech, biotech and the health care industries,” he said. “It’s not a huge wave of cash from China.”
Overseas buyers are interested in luxury high-rises sprouting up downtown, according to Matt Fuller, agent with Zephyr Real Estate and chief financial officer of the San Francisco Association of Realtors. Local buyers are looking for ways to turn hefty sums paid for rent into a long-term investment, he said.
“For people who can scrape together the down payment and stay for at least five years, it’s a smart investment,” said Patrick Barber, president of Pacific Union International Inc., San Francisco-based residential real estate firm.
Fuller said rents have become so high San Francisco is now viewed on a par with New York City by those taking jobs in the city’s red-hot economy.
“We’ve seen this trend develop over the past 18 months where people treat San Francisco like Manhattan, staying for a couple of years, stretching to pay rent by taking in several roommates, seeing what happens. They don’t intend to stay long enough to buy.”
Barber advocates city officials take every opportunity to add housing throughout San Francisco to increase supply and reduce prices. In a city that added 175,000 high-tech jobs but only 20,000 housing units in recent years, the neighborhoods can play a part in a long-term housing strategy. When people move out of single-family, multi-level homes, for example, they could be redesigned to create multiple dwellings.
If low interest rates that helped fuel a buying boom do edge upwards, Colwell and his industry colleagues don’t foresee a big impact on San Francisco.
“It would be a small,” Colwell said. “The amount of financing buyers seek is much less. On average, they put 33 percent down versus 20 percent nationally. Many properties attract two or three all-cash offers.”