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2015 Market Recap: The San Francisco Apartment Building Report

The San Francisco Apartment Building Market in 2015

A review of market values, conditions and trends,
illustrated with 18 custom charts.

January 2016, Paragon Commercial Brokerage

Some charts below apply specifically to smaller, 2-4 unit buildings, others to larger, 5+ unit properties, and some to both. Each segment has distinct market dynamics. The first 2 charts illustrate the year over year decline in sales volume, but the continuing increase in values.

This past autumn saw dramatic volatility in financial markets worldwide, which is now surging again in early 2016. Such volatility generates uncertainty, which can slow real estate markets as buyers wait for events to clarify, but it does not typically have a significant impact on real estate values unless there is sustained, negative movement. In the past year, concerns have also been voiced regarding mortgage interest rate increases, which so far have not materialized, and more locally, increasing apartment construction, housing affordability, and possibly over-valued, high-tech unicorns, and their potential impacts on employment, housing demand, prices and rents. There is a bewildering array of subtle, complex and interconnected moving parts in world, national and local, political and economic conditions right now. However, in our experience, there are often opportunities whatever the market conditions, for savvy, longer-term investors prepared to exploit them.

As seen above, 2015 saw a small drop in the sales of smaller, 2-4 unit apartment buildings in San Francisco, similar to that seen in the homes market. (It is not unusual for these buildings to have an owner occupier and/or be sold to buyers planning to occupy). There was a much bigger decline in the sales of larger, 5+ unit, investment properties: The latter drop reflected more a decline in portfolio sales (one owner, sometimes a financial institution, selling multiple properties) and an increased reluctance of owners to sell, than, so far, any substantial decline in buyer demand. Indeed, multiple offers on attractive listings remained common, the average sales price for 5+ unit buildings was almost 4% above asking price (7% for 2-4 unit buildings), and values continued to rise in 2015.

With low interest rates and soaring rents, many SF apartment buildings have become cash-generating machines, and prospective sellers would be challenged to find comparable returns in other investments. This reduces the motivation to sell and cash out. Furthermore, owners who might typically sell in order to buy larger buildings for better economies of scale via a 1031 exchange are daunted themselves by the difficulty of finding suitable upleg properties within the tight time constraints of tax law.

The first 4 to 6 weeks of the year are a slow period in real estate and the next tangible indication of market direction will come after the market begins to wake up in late-winter/ early spring.


San Francisco is a boutique market for apartment buildings, with the great preponderance of its sales in smaller buildings. Sales of larger properties, especially over 12 or 15 units, are relatively rare (and highly sought after). The market is mostly concentrated in a handful of districts, many of them built out in the first few decades of the last century, a period of great gracefulness of apartment construction.


Prices, Values & Appreciation Trends

By San Francisco Neighborhood and District


Supply & Demand

This chart below illustrates the year over year decline in new listings, total listing inventory and closed sales in the 5+ unit building market. The Prop G effect in Q3 2014 relates to an SF ballot proposal that struck horror in investors, but which subsequently failed at the ballot box: During that quarter, new inventory jumped while sales plunged. The market bounced back in Q4 2014 as relieved buyers leapt back in to take advantage of the increased supply, but then the conditions mentioned previously created a significant drop in both new listings and sales in 2015.


Residential Rent Trends & Comparisons

The city has seen a staggering increase in market-rate rents over the past 6 years, making it the most expensive rental market in the country. (See third chart below.) However, some firms that track average or median rents (each with their own methodology) have suggested that SF rents have recently either plateaued or ticked down (second chart below). Rents continued to increase in Oakland, which though expensive by any national measure, is still much more affordable than San Francisco. It is too early to come to any conclusions as to whether a supply-and-demand, affordability, or high-tech hiring inflection point has been reached in San Francisco, as market lulls and fluctuations are not uncommon.

In the first chart below, note that San Francisco rents fell far more after the dotcom bubble popped in 2001, and the resulting loss of thousands of high-tech jobs (see employment graph further below), than after the much larger, financial-markets crash of 2008. There is much vehement disagreement right now as to whether there are or are not meaningful parallels between the current high-tech boom and the earlier dotcom boom.


San Francisco Employment

Increased employment, driving both a growing population and growing wealth, is probably the single greatest factor behind the city housing market. Notice how closely the chart below mirrors the earlier chart on annual rent appreciation.


Interest Rate Trends

This chart pertains to home-mortgage rates, not investment-property interest rates, but the dynamics are similar. Over the course of 2015, interest rates increased by a negligible one seventh of one percent, remaining close to historic lows. Since the Fed announced its first increase in 7 years in mid-December, conforming loan rates went from 3.95% to 3.92% (as of January 14). Interest rates play a huge role in all real estate markets, and though many predict they will rise appreciably in 2016, financial-markets volatility may keep them low. It is famously difficult to predict interest rates movements with any accuracy.

In November, we issued a short update on new-housing construction in San Francisco, another important factor in the supply and demand dynamic. There are currently tens of thousands of new housing units, of all kinds, somewhere in the Planning Department pipeline: San Francisco New-Housing Pipeline


Q4 2015 Sales of 5+ Unit Apartment Buildings

There are so many variables at work in the SF multi-unit market, in location, size, unit mix, condition, pride-of-ownership, tenant-profile, the impact of rent control on income, and upside potential in rents (upon vacancy), that it is difficult to compare sales statistics between buildings without knowing the details. However, here is a look at some of the major financial parameters of sales of 5+ unit buildings in the fourth quarter of 2015.

Please contact me if you would like further details on any of the sales listed,
or on properties currently available to purchase.


Apartment Building Sales by Broker

In 2015, Paragon Commercial Brokerage represented more buyers and sellers in successful San Francisco apartment building transactions than any other brokerage. Paragon led in the number of transactions, as well as in the dollar volume of sales closed.

Our residential brokerage recently released its survey of the San Francisco homes market last year, which can be found here: The SF Residential Market in 2015


All information is from sources deemed reliable, but may contain errors, is not warranted and subject to revision. Statistics are generalities that typically disguise an immense variety of specifics in the individual, underlying sales. Numbers should be considered estimates and approximations, and how these statistics apply to any particular property is unknown without a specific comparative market analysis.

© 2016 Paragon Commercial Brokerage

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