Chris Foley is a co-founder and principal at Polaris Pacific and group leader of Polaris Pacific Analytics. The San Francisco company helps to sell newly built condominiums from San Francisco to San Diego. Foley acts as a consultant to some of the state’s largest developers. His expertise lies in the areas of land acquisition, site analysis, construction ﬁnancing and risk management.
Median condo prices resumed falling in 2011 after tax incentives slowed price declines in 2010 in all three of the region’s major markets. As 2011 closed, however, re-sales and pending sales of existing condos were spiking in Silicon Valley and Oakland and gaining momentum in San Francisco.
Median condo prices fell a whopping 36 percent in San Jose-Santa Clara from 2007 through 2009. As of October, the Oakland-Emeryville condo market had seen a 32 percent median price drop from the 2007 peak. The Peninsula and the Mountain View-Sunnyvale pocket have fared better, though both still saw double-digit median price declines. The San Francisco median price has been largely ﬂat since 2009 at about $638,000, after falling sharply through 2008.
All three major markets saw dramatic increases in their condo development in the middle years of the past decade. Polaris Pacific predicts more subdued new condo deliveries across the region in coming years with no high-rises in Oakland or San Jose for a number of years. In San Francisco, the ﬁrm projects an annual average of 160 new units delivered in 2012 and 2013. As the year closed, in San Francisco the proportion of all-cash buyers and so-called “absentee buyers,” (investors and second-home buyers) in the resale market was surging, often an indication of instability.
Together, San Francisco, Oakland, the Peninsula and the South Bay had standing inventory of about 2,600 new condos for sale going into 2012, according to Polaris Pacific research.
Where are the Bay Area’s strongest condo markets?
San Francisco, the Peninsula. And Oakland is rapidly becoming that way. In San Francisco it is so clear-cut it is not even funny. We are seeing renters come into our sales center: ‘Our rent just went up 20 percent. What do you have to sell?’ You can borrow at 4.25 percent, ﬁxed, for 30 years. And the prices are down 30 percent from the peak. Why would you not buy?
What are people buying?
In San Francisco they are looking at one-bedrooms for $500,000; for two bedrooms they are looking between $600,000 and $750,000.
And they qualify for ﬁnancing?
We sold three condos last week, and all three of the buyers put down 50 percent and ﬁnanced at 4.3 percent interest. So the lenders are out there. The lenders are ﬁguring out ways to work around all the di!erent regulations and provide a good ending solution to the buyer.
Then how can a private mortgage insurer like PMI Mortgage Insurance Co. run into ﬁnancial trouble?
PMI had been around a long time. They underwrote a lot of mortgages in ’05 and ’06. All those notices of default are peaking right now. It makes sense that if PMI were ever going to go down, they would go down now, at the peak of the foreclosures. The market they lent into is at a peak of its distress right now.
Which Bay Area markets are weak?
One is the southeastern quadrant of San Francisco: Hunters Point-Bayview. The prices went up a lot more signiﬁcantly than they ever should have. The market has fallen further because it was over exuberant. The second thing is you have such a high concentration of product. And those people were not making as much money as you would imagine. A lot of those people were the ﬁrst to get laid off. Then in Oakland and headed east and north, those markets felt a lot of pain.
What about Silicon Valley?
The technology sector is really helping us get out of the dismal economic situation. You are seeing the Twitter-Zynga-Facebook effect. You are seeing the high rises in San Jose getting velocity.
What’s happening with raw land?
What is getting built is multifamily apartments. The Urban Land Institute just did a study that said if you get your apartments built in the next two years, you are going to do great. You are seeing small condo products being built. Those are being very well received because you can ﬁnance a 20- or 30-unit condo product.
So you can’t succeed with just any condo project?
Let’s say you have a high-rise tower, single-phase, 500 units, and your average size is 1,200 square feet. Your ability to get that ﬁnanced is slim to none. It’s the wrong size, the wrong product type and it’s too many units. But let’s say you have a phased project, each phase was 150 units, and the average size is 950 square feet. I can get that ﬁnanced all day long.
How is the long-term outlook?
In the third quarter of 2011 we signed $300 million in new listings. In Q4 we will probably sign $150 million in listings. Those are all people getting started now with delivery in the next 12 to 24 months. You are going to see a lot of cranes. It is going to be four-story-over-podium. In eight to 12 months you are going to see probably one high-rise go vertical. You are also seeing a much higher quality of developer. You are seeing a lot of the same developers who used to be around, but you are also seeing a whole new breed of developers coming in. They are better capitalized. They have learned from what happened and they are much leaner, and they are much more focused on smaller unit size, higher-end design. This is their business, their passion. The B- and C-level players, a lot of those people went away.You are probably not going to see a high-rise built for a few years in Oakland, and probably not in San Jose. In Oakland a lot of product that was built condo and went rental is going to come back into the condo market. After that you are going to see new construction. On the Peninsula, it’s all about town homes.
By Robert Celaschi
Source: The Registry