By David Bitner, Americas Head of Capital Markets Research
A new annual report from Cushman & Wakefield, Winning in Growth Cities, examining global investment revealed that despite geopolitical uncertainty and a slowing in the economic cycle, investment in the global property market saw a significant rise of 18% year-on-year to a new record high of $1.8tn (2017: $1.5tn). The report, which also drew upon sales data supplied by Real Capital Analytics (RCA), spanned the 12 months from July 1, 2017 to June 30, 2018 (or Q3-17 through Q2-18). The report also ranked the top investment markets in the world during this period: #1 – New York, #2 – Los Angeles, #3 – London, #4 –Paris, #5–Hong Kong, #6 – San Francisco, #7 – Washington D.C., #8 – Tokyo, #9 – Dallas, and #10 – Chicago.
And while global property showed a collective increase in investment volume of 18% year-over-year, San Francisco Metro market volume actually fell by 18% from $31.9bn to $26.2bn year-over-year. This decline, which I will explain further below, also led to San Francisco falling a few slots at the global level to sixth place this year compared to its ranking of third in the world the previous reporting year. Northern California’s top metro market was surpassed this year by all three non-domestic markets; London, Paris and Hong Kong, respectively. However, indicative of its longstanding desirability and magnetizing attributes, San Francisco—whose boundaries consist of the Greater SF Bay Area for this report—did maintain its third place status within not only the United States but also all North America, again trailing only New York and Los Angeles, which respectively remained as the top two global cities.
Most of the decline in San Francisco Metro investment sales for this latest 12-month reporting stretch was attributable to the office sector where most trophy product had traded earlier in the cycle. Over the last several years, there has been a shift toward ground-up development versus acquisition of existing properties. Meanwhile multifamily sales remain at historically high levels, despite softness in the area’s high-rise market and concern over Costa Hawkins (California’s rent control law) potential repeal. Retail has certainly softened compared to 2017, but that trend is no different from many other areas in the country. However, industrial sales activity in San Francisco has been accelerating and remains at or near historic highs.
While overall volume in San Francisco did decline noticeably this period, it is very important to point out that San Francisco investment sales were actually up in the first half of 2018 compared to the first half of 2017. The annualized comparison in our global report, however, revealed weakness because the second half of 2016 was much stronger than the second half of 2017.
Conversations with investors point to increased focus on West Coast markets from foreign capital, which should in time translate to greater acquisition activity. Mainland China capital is liable to remain on the sidelines for the foreseeable future, but domestic institutions and other foreign capital may well see this as an opportunity.
The unmatched depth and breadth of innovation sectors in the Bay Area give rise to network effects that are unmatched elsewhere. This drives the economy and this drives real estate values in the Bay Area. These effects seem only to be deepening over time, though increasingly there are competing centers both within the U.S. and internationally. I tend to believe this position places an effective floor under both investment activity and pricing in the Bay Area.