By Garrick Brown, Vice President of Research – West Region
So the Rant is back and this week GoldenGatewe have a double issue to catch you up on the most recent news about town. The stock market appears to finally be stabilizing from the volatility of the last five or six weeks so I would like to get back to what I see as the biggest challenge to the Bay Area economy.
It’s not the stock market… at least not right now. In fact, the most commonly asked question I have been fielding in speaking at local events over the past nine months or so has been whether there is a stock bubble and when would it burst. When taken in that context, a market correction… (assuming investors don’t panic and turn it into something bigger than that) is not a bad thing at all. However, I would assert there was not a bubble before this sell off. We might have been in the early stages of developing one, but the price/earnings ratios simply didn’t show it.
When the market crashed back in the first tech wreck, the S&P 500’s average P/E ratio was 44.00. It reached an astounding 123.73 in 2009 at the height of the Great Recession. Today it is 19.84. A few weeks ago, before the selloff, it was 19.55. The all-time average is 15.50 so current values are a little rich. But they are nowhere close to bubble territory.
Remember that this most recent Wall Street freak out has all been about China. The recent decline in the Chinese stock market shouldn’t come as much of a surprise. The Chinese government has been propping up their stock markets for the last couple of years as it encouraged investors to shift from real estate investment (where the Central government was trying to head off a bubble) to the stock market. Check out this great piece that NPR ran recently; Beijing Government Spurred Ordinary Investors to Make Risky Margin Bets. Another solid piece of journalism on the topic ran a little while back in Townhall.Finance.com; China’s Turmoil Good News for U.S. Economy and Stocks.
But I don’t want to get sidetracked on this… we are going to continue to see volatility in the next few weeks, if not months. This week the driver will be concerns over the Fed and interest rates. Guess what? They’re not going to raise them this week. If they do, the markets will be right to panic. Not because the actual interest rate hike itself would be that bad but simply because it would so fly in the face of conventional wisdom as to create serious concerns as to their judgment. Trust me. If Vegas took bets on things like this it would be your classic 100:1 longshot.
But something else you need to remember is that the Chinese economy isn’t going to collapse either. Really, I don’t see our stock market going through an ordinary, garden variety correction as a bad thing. We haven’t had one for more than four years. A pause in the action and a recalibration of values with the underlying fundamentals would actually enable the U.S. economy to return to growth ahead again for an even lengthier period than had we not had a correction. Sadly, I am more concerned that we end up coming out of this period not having actually had a correction so much as a couple of months of seesaw activity that lands us right back to where we were. And where were we? We were not in bubble territory, but we were at a point where it appeared that the stock market had gotten a little too far ahead of the rest of the economy.
But let’s get back to the biggest threat facing the Bay Area. The biggest threat to the Bay Area economy’s current run continues to be the region’s spiraling cost of living. The Center for Regional Economic Competitiveness released its quarterly Cost of Living Index (COLI) yesterday and… no big surprise… the cost of living has continued to grow in the Bay Area.
The good news is that we still have not surpassed Manhattan as the most expensive place in the US. As of the close of Q2 2015, Manhattan’s reading in the COLI survey was 219.7. What’s that actually mean, you ask? Well, the methodology is simple. They gather economic data on multiple fronts (ranging from the cost of housing to the local price of groceries, utilities, transportation, healthcare and a number of other factors). They do this for hundreds of local markets across the United States and then they take the overall average and make that equal 100 for the national average. So basically it means that on average, throughout the United States $100 will buy you $100 worth of goods. In Manhattan, you need to spend $219.70 to get what $100 would get you on average in the United States.
In the San Francisco/Redwood City/South San Francisco statistical area, you will have to spend $176.10 to get $100 worth of goods. By the way, three months ago you had to spend $173.20 for that same $100 worth of goods. That’s a 1.6% jump in three months at a time when inflation is virtually zero nationally. The City has always been an expensive place to live, even by California standards, but this latest surge in the cost of living all comes down to the impact of housing. Or, more correctly, the impact of not having enough of it. This is why I chose a piece that ran in The Registry recently, Housing: The Bay Area’s Achilles Heel, as our featured story in this week’s expanded edition of the Rant.
The critical takeaway is that we are still at less than 50% of the housing starts we averaged pre-2008. We crunched some numbers and found that the local Bay Area population grew by about 340,000 people between 2010 and 2014. Yet, we tracked only about 40,000 new housing units that came online during that time (multi and single family). This comes out to one new housing unit for every 8.5 people. Which makes sense, because you probably need to cram about 8.5 people into a San Francisco apartment nowadays to afford your rent if you are an average Joe.
Here is the good news; we are now tracking over 51,000 proposed multifamily housing units throughout the nine county Bay Area. The bad news is that this is on a timeline that could extend out a decade or more for some projects and many of these are years from approval much yet construction. But we are also tracking the largest apartment development pipeline we have ever tracked with nearly 21,000 multifamily units currently under construction. Just over 8,000 of these are in San Francisco, while we are aware of nearly 6,400 new units being built in Santa Clara County and another 2,100 in Alameda County. These will help to relieve upward pressure on both rents and the cost to own, but are nowhere near enough. We are years behind where we need to be to keep up with recent population growth and that growth has come not just organically but, in large measure, from the in-migration of over 200,000 new regional residents. Ironically, most of those new arrivals were attracted here by the very economy that could be threatened if the cost of living and doing business in the Bay Area doesn’t see some relief soon.
This post is commentary from the latest weekly edition of our Bay Area Research Rant, which you can subscribe to for free by e-mailing email@example.com.
Garrick joined Cushman & Wakefield (formerly DTZ / Cassidy Turley) in October 2010. He serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.