Introduction
One of the Wall Street Journal articles that caught my eye last week was this one: “Hoping the Sizzle Will Sell the Steak in a Condo Slowdown: Developers Throw Parties Unrivaled in Their Glitz to Wow Real-Estate Folks.”

The article was about the large overhanging inventory in the condo market in Manhattan, Las Vegas and Fort Lauderdale. Some of the local developers are spending lavishly on parties to woo real estate brokers to sell their products. The article talked about the parties and some of the gifts that are lavished on the brokers; not the clients. A couple of excerpts: “… most of the parties feature models, lobster and champagne,” and “1.5 carat diamond cuff links (for male brokers) and diamond encrusted dove-shaped pins (for female brokers), and alligator-leather covered notepads… .”

So I wondered whether I would soon be participating in such parties here in San Francisco, and whether I might need to start shopping for some French-cuffed shirts in order to ready myself for diamond cuff links, which would undoubtedly enhance my sartorial splendor. Well, so much for idle daydreaming.

2006 Update
Last year the media, including our local Chronicle, beat the drums about the real estate bubble bursting. This year it seems that virtually every real estate story is about reduced sales volume, rising foreclosures and lower prices.

Other than what you and I read in the papers about foreclosures, I can’t shed any light on this subject. Suffice to say, however, I assume that foreclosures are happening throughout the city, just as in other places in the United States.

During the first five months of 2006 (vs. the same period in 2005) prices are slightly up and sales volume is down 10+%. Here are the numbers – citywide:

Though average prices are up this year, price growth is nowhere near the 15+% appreciation for single-family homes and condominiums throughout the City in 2005 and 2004. The bubble hasn’t burst, but “The Soufflé Has Arrived” (see my Pulse of the Market for October 2005). Sales volume is off 16% for single-family homes and off 12% for condominiums.

Looking Forward
What’s the likely impact of the new condo towers that are appearing in South Beach, Rincon Hill and SOMA? Are there diamond cuff links in my future?

In the last four years there has been an average of 2,945 condominium re-sales in the City. Let’s just say that the norm is about 3,000 units per year. That’s re-sales of existing new product, separate from first sales of units in new developments.

Take a look:                                                                                       

*This is an estimate of total new units sold throughout the City; not just in the south of Market neighborhoods.

Using the $835,236 average in 2005, a total of $2.4 billion was spent by buyers on re-sales for condos in existing buildings, and a total of $843 million was spent on new product.

The Really Important Issues
My best guess is that we will not see aggressive sales incentives bestowed by San Francisco developers across the board, but we will see such tactics employed on a select basis by those developers with secondary product; product that is location-challenged, amenity-limited and/or priced too high.

Though I like to refer to myself as an idiot savant, i.e. somewhat of a savant about San Francisco and an idiot relevant to every place else, my sense is that the San Francisco market is way smaller than Manhattan, Fort Lauderdale, Las Vegas et al, and the recent and planned condominium developments are much smaller in absolute terms relevant to the other major cities.

Sure, sales velocity at some of the newer buildings will be slower than originally forecast, some of the developments will not be built and some developers will not make the money that they had originally anticipated. As you know from my previous Pulses, I am a very strong advocate of the long-term value proposition of San Francisco residential real estate. But that doesn’t mean that everyone makes money, and some developers will resort to aggressive sales incentives.

The developers can take care of themselves, but from a buyer and seller perspective, there are several really important issues.

The significant development that is taking place south of Market will impact condominium values throughout the city, and those who have already bought in South Beach, Rincon Hill and SOMA, or are thinking of buying there, need an expert advocate (read: a real good real estate agent) to pick their way through a  landscape filled with opportunities and pitfalls.

If you own or buy a condominium on the north side of town and go to sell it in the next couple of years, you are likely to see fewer buyers, which may translate to a lower price. Why? Because buyers coming into the market have alternatives that they didn’t have before. Besides re-sales at 199 New Montgomery, 333/355 First St., 200 Brannan, 400 Beale, etc., they now or will have opportunities at 300 Spear, 425 First St., 301 Mission, 1160 Mission and many more. Anyone with $500,000-1 million+ in their pockets can spend that money anywhere they want. Property owners in Cow Hollow, Lake Street, Noe Valley and so on are not sheltered from this fact.

The more difficult and tricky issue is the one facing people who already live, or plan to buy, in the south of Market neighborhoods. If I already live (or plan to buy) at The Metropolitan (333/355 First St/), for example, how are the new developments going to impact the value of my unit? If I live on the south side of The Metropolitan towers, my views and light are likely to be impacted by the new towers being erected at One Rincon Hill (up the block at 425 First St.). If I am on the north and east sides, my views may also be impacted by the towers being erected at 300 Spear and subsequently at 201 Folsom. These view and light considerations are not concerns for those who currently live on the north side of town where new (major) developments are no longer taking place.

What about location considerations? If I buy or already live at Bridgeview (400 Beale), 199 New Montgomery, The Brannan (219-229-239 Brannan) or elsewhere, how will future developments impact the value of my property? This comes with the associated question: Which of the new developments should I buy? These are not easy questions; in fact, they are very complex, because the competitive landscape is changing dramatically south of Market and not every buyer and seller, nor every developer, is going to end up a winner.

Summing Up
I don’t have a crystal ball showing the number of new developments that will actually be built in the next few years, nor do I know of a reliable source that can answer this question with any accuracy. I am pretty confident it will be more than 1,000 units per year and probably less than 3,000 units per year for the next 5-10 years, though I can’t prove it. On the low end, that means 33% of the re-sale market, and on the high end, 100% of the unit re-sale market. My question is less about the unit number and more about how much demand there is in the marketplace. In addition to $2.5 billion being spent on re-sale product, is there incremental demand for $850 million or $2.5 billion in new product – annually?

Whatever the demand is, it is going to have an impact on the value of condominiums throughout the city, as noted above. With regard to buyer and seller clients, however, the most important issue is choosing a property very carefully within the context of the changing landscape. Those properties with views, ambiance and location will sell at premium prices. The rest will be giving away diamonds and champagne.

Below is a map showing a sample of existing and new developments in South Beach and Rincon Hill. Many buildings are not shown, including several developments in Mission Bay (south of Brannan St.) and parts of SOMA, essentially west of Second St. There’s a lot of activity, which I know is a gross understatement.

South Beach and Rincon Hill

And here are two pictures showing the present and future San Francisco skyline.

Downtown San Francisco from Treasure Island – 2006

A Rendering of the Future

Images by Peter Bosselman/Urban Explorer, courtesy of San Francisco Planning Department.

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