By Robert Sammons, Regional Director – Northwest U.S. Research
A couple of uneven quarters after the longest economic expansion in (modern) San Francisco history and people start reaching for the panic button. Yes – this opening statement does mean that our office statistics for the third quarter are a wrap. Are they good? Are they bad? Well that really all depends on what side of the deal you find yourself on doesn’t it? In either case the numbers actually fall somewhere in between. At the end of the day (or the quarter as is the case here), San Francisco remains a relatively healthy market by many metrics and compared to most other U.S. markets – job growth, vacancy rate, rents, construction. Are there issues? OH YES. I’m going to stay away from topics such as the election or a possible interest rate hike in December. The big items I’m focusing on tend to affect the entire Bay Area economy and not just the commercial real estate market. Three of those are listed below which all actually relate to market growing pains more than anything else.
Job Growth – still healthy but always bears watching as that drives essentially everything. Thus far, the Bay Area remains in good shape but there has been a slowdown in the growth rates. For the San Francisco metropolitan division (which does include both San Francisco and San Mateo counties), the unemployment rate closed out August at 3.4% which is down minimally from 3.5% one year ago. It has been bouncing along around this level for the past year but one has to realize this is essentially full employment. In fact, for all the talk of layoffs among some tech firms (yes there have been some and no they haven’t been overwhelming at this point by any means) private sector jobs hit a new record figure in August, expanding by +2.4% over the past twelve months. Total office using positions grew at an even faster pace of +2.5%. But for the year prior, those figures were at +5.3% and +7.5%, respectively. Those latter growth rates, however, are not sustainable over the long-term (and have caused issues related to bullets #2 and #3 below).
Transportation Infrastructure – do I really need to keep bringing this up? We should be upgrading our mass transit throughout the region. It’s “in process” but in many cases it’s too little though hopefully not too late. BART has a bond initiative on the ballot on November 8th which would give them $3.5 billion (San Francisco, Alameda and Contra Costa counties – you will see this as Measure RR). A two-third majority is needed to pass this bond. I really shouldn’t advocate how you should vote but really what is our alternative? If you have ideas let me know because I’d love to hear them. In reality our various mass transit systems (BART, MUNI, Caltrain, etc.) and our roads need a lot of work but maybe this could at least move the needle a little more. And do I really need to tell you to vote no matter how you feel?
Cost of Living – particularly tied to the cost of housing. And actually I can circle back to point two above regarding transportation. As housing prices go up, many move further and further out and put further strains on our public transit and our roads. The Bay Area is playing catch-up (finally) after falling behind for so long. Of course, much of what is being built is market-rate (even with all the various rules and regulations in place, particularly in San Francisco, to build so called affordable housing. Across the entire nine-county Bay Area, the population increase between 2012 and 2015 was just under 400,000 yet we added a total of 58,000 housing units (single and multi-family) according to Moody’s and the U.S. Census Bureau. Obviously there was housing available before the new product but just taking those numbers that would be one housing unit for every 6.9 new residents. Housing starts are strong, however, and the proposed multi-family units alone (52,600) will help tremendously if most are built. Of course, the lack of housing has caused the real problem – the cost of housing with almost all markets in the Bay Area ranking at or near the top in the cost of a residence to buy or rent.
So I did go on and on about the “big picture” topics and haven’t even begun to discuss the specifics of the San Francisco commercial real estate market at the third quarter. For the most part, I’ll leave that to the infographic linked here. This will give you the low-down on the quarter including a bit of an overview and an outlook. For the overall San Francisco market, the vacancy rate did rise slightly and the asking rent was essentially flat; net absorption was positive due to a renovated building delivering 100% occupied; new leasing activity was weak; and new office construction deliveries will pick up next year. On the flip side, we still have strong tenant demand with several major transactions due to close in the fourth quarter while investment interest remains quite strong though the mix of investors has changed somewhat.
I don’t believe there’s a need for that panic button – put it away for now please. I do believe San Francisco and the entire Bay Area are suffering from growing pains and there will be ebb and flow to the market. Are we too weighted on tech? Or we not weighted enough? Well tech is many things within essentially every industry now. And there are areas of growth we are just exploring from autonomous vehicles to robotics to virtual reality. And much of that is being created here. Too much Rah-Rah? I know other areas of the countries and the globe will get their fair share and more of future tech growth but I do believe those areas mentioned (and others not yet known) will want and need to have a presence in this market.
Our full report for San Francisco and our other Bay Area markets will be delivered starting this week – look for that. Our research landing page is located here where you can find the latest and greatest Cushman & Wakefield research from across the globe. And please let me know if you need anything and I will do my best to expedite the process.
This post is guest 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.
Robert Sammons is a Research Director for Cushman & Wakefield. Based in San Francisco, Robert’s principal roles include working closely with the C&W research teams across the Northwest – including Northern California, Portland and Denver. Robert is author of numerous documents that delve into a wide variety of real estate and economic trends. He has been a quoted source for all manner of real estate and related economic information in many widely known media outlets across the country. Robert has 29 years of real estate experience as both an appraiser and researcher. He earned a BBA in Real Estate from The University of Georgia and an MS in Real Estate from Georgia State University. Robert is a member of the Urban Land Institute.