Is San Francisco’s real estate party almost over? Report forecasts slowdown

Roland Li
San Francisco Business Times
March 24, 2015

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This story has been updated to reflect PwC retracting its forecast of a decline in San Francisco office rents. The Business Times confirmed the decline with PwC twice. The firm has now said it made an error in one of the data points related to the decline.

San Francisco’s office and multifamily real estate markets will see a slowdown in rental growth and a contraction starting this year, according to a report by PwC.

PwC projects that new office construction will raise supply by around 6 percent, which will lead to excess space that “will put increased downward pressure on rent levels,” said Emily Pillars, partner at PwC.

The PwC report is based on responses from real estate investors and data from commercial real estate brokerages.

The forecast for Oakland’s office market is more positive. PwC forecasts expansion between 2015 and 2018, and the beginning of a contraction in 2018. San Jose’s office market is projected to have a downturn in 2015 and 2016, followed by recovery and expansion over the next two years. The overall U.S. office market is in a recovery this year, followed by expansion over the next three years, said PwC.

Other real estate economists disagreed with the severity of the report in regard to San Francisco. While they anticipate rents to grow more slowly in San Francisco, they do not expect them to fall sharply, barring a national downturn.

“Rental growth may be slowing, but our sense is vacancy is not necessarily going up,” said Colin Yasukochi, director of research and analysis at CBRE’s San Francisco office. “We don’t see a material change.”

San Francisco’s job growth and office market has been highly dependent on the tech sector, but Yasukochi notes that the industry encompasses many services including finance, professional services and healthcare. The sector is more stable compared to the dot-com crash in the early 2000s, he said.

Cushman & Wakefield also sees a weakening in the office market, but no reason to panic.

“We are forecasting a slowdown but not a recession due to a combination of the general ebb and flow of job growth along with an increase in new office product deliveries across the 2015 through 2018 period,” said Robert Sammons, regional research director at Cushman & Wakefield in San Francisco.

San Francisco’s Class A rents were $64.33 per square foot and the vacancy was 6.7 percent in the fourth quarter, among the strongest in the country, according to Cushman & Wakefield. Rents are expected to rise to in the next three years to $75.49 per square foot at the end of 2017, before dipping to $74.66 in 2018. However, the vacancy rate is also projected to rise to 9.8 percent in 2018, said Cushman & Wakefield.

“Of course, many people remember the dot-com meltdown of 2000 to 2001, but it really is a different economy today,” said Sammons. “That’s not to discount the fact that there could likely be some contraction but I don’t see any serious downturn on the horizon – barring a global meltdown.”

PwC also said that multifamily construction in San Francisco will outpace demand, leading to slowing rental growth in 2015 through 2018.

“While we are anticipating rental growth, it’s not at the same strong levels it has over the past few years,” said Pillars of PwC.

San Francisco rents hit a record high in January to a median of $3,410, according to residential listings firm Zumper, with rents surging 13.5 percent in 2014. But rents in pricey neighborhoods including Russian Hill, the Marina and Nob Hill have dropped slightly this year.

“We’ve certainly seen some reductions in the growth rate here in San Francisco,” said Brian Coyne, head of sales at San Francisco-based Zumper. “We have $3,000 studios in the market now. That can’t continue on forever.”

But Coyne thinks that the city’s new market-rate housing development will be absorbed by demand, keeping rents high, despite the thousands of units under construction.

“That’s still not enough to keep up with the current influx of jobs,” he said.

 

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