Fundamentals are strong, and the region maintains its interest for investors.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JANUARY 2016[dropcap]P[/dropcap]aul Zeger and Polaris Pacific have been the definitive source of information for new construction sales and marketing of condominiums in the Bay Area for over 30 years. His leadership in identifying and capitalizing on residential development opportunities has garnered him a client list that includes some of the most successful real estate development firms on the West Coast – TMG Partners, Emerald Fund, Lennar Urban and Wilson Meany to name a few. Having gone through a number of cycled, Paul and his team have a perspective on the Bay Area market that is second to none. Below, we explore his perspective on the market and implications of today’s setting on the evolution of housing in the Bay Area.
[contextly_sidebar id=”pvpr1SLJSA5hgGwE4PQvuhyx9kS07Ohz”]TR: How remarkable is this market for someone in the housing industry in the Bay Area?
ZEGER: After 25-plus years and several real estate cycles I’ve learned that every market has its opportunities and its challenges. That said, it’s exciting to be in a very active market where we are seeing extensive development and great investor confidence.
TR: Does that strength worry you?
ZEGER: The current economic fundamentals in the Bay Area are outstanding, so we are anticipating continued growth over the next several years.
TR: We have now surpassed all the measures for rents and sales since the last high. How much more room is there in the market for growth?
ZEGER: When you compare San Francisco to other world-class cities, our real estate is still a bargain, relatively speaking. The Bay Area is blessed with an abundance of high-earning professionals as well as deep demand from affluent consumers both nationally and internationally. As long as demand far outweighs supply we will continue to see values rise.
TR: One of things that Polaris Pacific does is work with developers on development strategy. What worries developers the most about our market at this point in the cycle?
ZEGER: Rising construction costs are the biggest challenge for our developer clients. A large percentage of the increasing values has been rapidly absorbed by higher land costs and rapid cost inflation. To make a deal pencil in today’s environment you are betting on continued growth.
TR: You have been successful in helping companies with developments in the urban and urbanized cores throughout the West Coast. What are some trends that you are seeing emerging that will define the market in the next decade?
ZEGER: There is a clear trend of consumers choosing to live in the urban core, avoiding commuter challenges. Renters and buyers are motivated to stay in the city and are happy to live in smaller homes if that is what it takes. There is also a trend of high net worth families collecting large urban residences as a part of their lifestyle and investment portfolio.
TR: Many marketers talk about the millennial generation as a distinct group of buyers, but are they going to look and behave like all the other generations ahead of them as they begin to age?
ZEGER: We are just beginning to see this demographic move into the prime home buying years and early evidence suggests that once they are in relationships and start having children they fall back into more traditional housing needs. Education represents the largest challenge for these consumers. They’d prefer to stay in the city but have to deal with the available options for urban schools if they plan to have children.
TR: What changes are you seeing in the product itself? What worries you about that, and what excites you about that?
ZEGER: We are seeing a bifurcation of products, with entry-level and move-up home options focused on affordability, which translates to smaller sizes. At the other end of the spectrum we see growing demand for “ultra-luxury,” very large homes for the affluent. There are very few options in the middle, forcing many consumers to leave the city to meet their housing needs.
The exciting thing about this robust market is that we are seeing more housing overall, especially on the rental side, which should help ease the demand pressure and also provide resources to accommodate the expanding affordable housing programs. On the down side, we are rapidly out-pricing many consumers who have been in the city for generations and are now forced to move away to satisfy their housing needs.
TR: Do you think that the rise in interest rates will have an impact on our market? If so, what type of product and which geographies will feel the pinch?
ZEGER: Rising interest rates means higher costs for developers and higher monthly payments for homebuyers. The desirability of the Bay Area will probably sustain demand above supply, but it will be harder to provide affordable options and consumers will be forced to move farther from the urban core to find good economic alternatives. That places a burden on many of our aging transportation systems.
TR: This has been a remarkably long recovery for the region. Are we in uncharted waters? What do you think that means for the housing market in the region?
ZEGER: Memories are short. It’s only been five or six years since the worst downturn in our region in decades. We will see adjustments in the market but with the underlying economics – capital investment and continued job formation – strong, the Bay Area still represents one of the best investment markets in the U.S.
TR: Oakland and other parts of the East Bay are traditionally the last to catch on with the rest of the region. Do you see the changes happening there to be somewhat different than in the past cycles?
ZEGER: The pressure on San Francisco and the Peninsula has put the East Bay in the spotlight as an affordable option. The growth in the East Bay’s economic base has been substantial in the last few years and that reality, combined with the outstanding weather, cultural opportunities and good public transportation, has created the critical mass that Oakland and the surrounding cities needed to re-establish themselves as a desirable residential alternative. We believe the East Bay will see expanded activity over the balance of this cycle and well into the next.
TR: Are you optimistic about the next year and the immediate future? What challenges are you anticipating in the near term in your industry and more broadly in real estate?
ZEGER: As one of the partners of the West Coast’s largest urban new home sales and marketing company, I have to be optimistic to get out of bed in the morning and lead the charge into the market. That said, I am also an economist by training, so we study market conditions in great detail. In the next two to three years we are not seeing any major obstacles to continued growth, so I feel my natural optimism is justified. Over the long term we need a means of maintaining a healthy balance in the urban population so that we don’t become a city of only affluent residents. This will likely result from more effective urban policy by the Bay Area governments.