Article by Steve Ginsberg San Francisco has been a boom-bust economy since the 1800s, but the residential housing sector has been as consistent as summer fog. Prices always rolled upward, vaporizing the city's housing affordability. No housing bubble has ever truly burst in the city because demand has always greatly exceeded supply. But now some are wondering whether the city's residential market is in danger of deflating, should the economy continue to head south. Catellus Development and Avalon Bay, for example, are holding back with approved projects at Mission Bay and eyeing delayed starting dates as they try to gauge the city's appetite for new housing. Both have high-rise buildings in the ground today representing more than 750 units, but won't start second major buildings until they see how sales and rentals go for their first buildings. Prudence has replaced a gung-ho, build it and they will buy mentality. Talk It Over A summit entitled "The Housing Bubble: Fact or Fiction?" is being sponsored by Emeryville-based Inman News next January in Los Angeles. The issue has bubbled to the surface because the soft economy has led to an easing in parts of the residential market, especially in trophy properties above $2 million. Veteran residential agents say the bubble if that's what it is has partially broken for apartments, with rental rates off nearly 20 percent in San Francisco. "We peaked in April 2000 and prices are off, especially in homes above $2 million. Under $750,000 the market is still brisk, and we still see some multiple offers on homes with special amenities," said Debbie Hemingway, an agent at Pacific Union who has worked many San Francisco neighborhoods for 16 years. "A lot of people who couldn't afford Pacific Heights are now buying homes there and not settling for the inner Richmond. With an impending war, a lot of buyers are staying neutral and not upgrading right now." Dr. Raphael Bostic studies housing bubbles as director of the Casden Real Estate Economics Forecast at the University of Southern California. He believes the market here has already cooled with the disappearance of multiple bids. Prices have already adjusted to the economy, he said. If the economy worsens, prices will likely come down in San Francisco, but he doesn't foresee the 30 percent drop here that Southern California experienced in the early 1990s. The Bay Area lacks the speculation and rampant building that drove housing prices there, he said. "The interesting issue is what type of housing is going up in San Francisco. There is no guarantee that non-family-type housing will sell. We are seeing in Southern California with our large Latino population a desire for three- to four-bedroom family homes," Bostic said. "The more housing that goes on line in San Francisco, the higher propensity for home prices to fall." In a city that averaged 1,000 new units of housing a year for the past decade, a mini-boom in residential development is now under way with 1,900 units being delivered in 2002. With commercial office development dead in the water, residential is the only game in town, and many developers, including office names like Tishman Speyer, are looking to get into housing. Citywide, nearly 3,300 units are either under construction or in the building permit stage, 3,500 units are already approved, and 5,660 are in planning stages in a city that has the second lowest rate of homeownership in the country next to New York. The new units are a combination of rentals and for-sale condos. Jim Chappell, director of San Francisco Planning and Urban Research, says the city needs to build at least 25,000 units to stop middle-class flight over the next 10 years. The Overbuilding Myth Oz Erickson, a principal at the Emerald Fund, perhaps the city's most ambitious condo developer, said the only thing that could burst a housing bubble here is a spike in interest rates. As long as rates stay low, his projects will continue to sell out, he said. "We have just eight units out of 88 left in our North Beach Malt House project, and in our Alemany project that we just finished we have sold 210 out of 370," he said. "I'm hearing this bubble talk but I'm mystified by it. People are actually moving back into the city. It is a solid market, clicking along. There is softness in the $1.2 million range, but anything priced between $400,000 and $650,000 is just doing fine. "With low interest rates, it's cheaper to buy than to rent when you calculate the after-tax advantages." Erickson said that despite the projects being built, the city will not be able to keep up with latent demand. He expects just 1,300 new units will reach the market in 2003. Much of the development in San Francisco is in high-rise condo units geared to young, single workers and empty nesters who have cashed in their suburban homes. Traditional families (husband, wife and kids) are in the minority in San Francisco, making up just 25 percent of the home-buying public, allowing developers to continue to shape their projects for singles and couples. Developer Marty Dalton's Union Property Capital is getting approvals for an 860-unit luxury highrise at 300 Spear St. and is working on four other projects. "I have to guess what the market's going to be like three years in the future," he said. "Now we're about to go to war, we're in recession and people are scared, and there are a lot of limits in the market. Units under $600,000 are still selling as quickly as they were two to three years ago. The market above that tends to thin as people's confidence lessens." Steve Ginsberg covers retail and real estate for the San Francisco Business Times.
October 25, 2002