Earlier this month, UCLA’s Anderson School of Management and law firm Allen Matkins released their most recent survey of California developers and found that those with a stake in building housing are feeling gun shy about the Bay Area.
The report, titled a “Commercial Real Estate Survey” but focusing on multi-family home development as well as office and retail, surveys “supply-side participants”—i.e., commercial developers and financiers of commercial development—about the immediate future.
For the most part, the news is fairly sunny, but there’s one dark cloud hovering right over the bay:
- In general, the forecast is positive across California, even defying recession fears: “The positive prediction for 2022 development leapfrogs UCLA Anderson Forecast’s prediction of a very weak economy through 2020 to its prediction of faster growth thereafter. The results indicate, that although construction activity is expected to slow down over the next 18 months, developers are already gearing up for the next CRE expansionary cycle.”
- The Bay Area, however, is the big exception: “For all three markets—the East Bay, San Francisco, and Silicon Valley—developers think that 2022 will see worse economics than 2019.”
- Production of multi-family homes specifically is expected to decline: “In the last six months, Bay Area developers have pulled back on new development, and half of the panelists stated that they were not planning to start a new development in the next 12 months.”
- Souther California is considered a brighter prospect: Of the six regions cited, developers felt mostly optimistic about LA, Orange County, and San Diego, but downbeat specifically about SF, the East Bay, and Silicon Valley, with Silicon Valley retaining the lowest degree of confidence. In general, those surveyed were less optimistic about nearly every market compared to last year, but markedly less so in SoCal than the Bay.
- The survey authors cite market fluctuations as one potential explanation for this caution: “Home prices are falling in the Bay Area and the inventory of homes listed for sale has grown.” The idea that home prices are falling in any major sense in the Bay Area is likely an exaggeration; however, it’s true in isolated cases that suggest the market is much weaker than in the past five or six years. According to the California Association of Realtors, the median price for a Bay Area home—multi-family and single-family included—declined 3.1 percent year over year in July to $950K.
- They also speculate rent control talk might be the culprit: “As the most expensive rental market in California, [the Bay Area] is the most likely to be impacted by the growing movement towards rent control.” Gov. Gavin Newsom recently backed SF-based Assemblymember David Chiu’s rent cap bill AB 1482, but that law would sunset in just three years and still allows annual rent hikes up to 10 percent in most cities, so development that begins now is unlikely to be troubled by it. LA-based AIDS Healthcare Foundation wants to put a more aggressive rent control measure on the ballot in 2020, but the most recent previous bid to expand rent control failed with voters.
Notably, the forecast doesn't mention the spiraling cost of construction in the Bay Area as a potential mitigating factor.
According to the San Francisco Planning Department, SF has nearly 73,000 new units “in the pipeline,” but only 8,500 of those are under construction.