Development of market-rate housing in San Francisco will slow to a trickle in 2019, because a combination of higher construction costs, escalating fees, a softening market and increased interest rates has persuaded many builders to wait on the sidelines, developers and industry analysts say.
Development “is not going to happen,” said Sean Keighran, president of the Residential Builders Association, which represents developers and contractors. “There are four strikes, and you only get three. It’s hard to foresee a rosy path forward.”
The median price of a single-family home in the city has fallen 15 percent from its peak of $1.7 million in February 2017, according to real estate brokerage Compass. While the median price of $1.44 million is still out of reach for most people, it’s enough to have a chilling effect.
“Nobody buys land and develops in a downward market,” Keighran said. “Our guys stopped buying sites a year and a half ago.”
Construction costs in San Francisco have more than doubled during the past five years — the average cost of building a new home in San Francisco is now more than $700,000. In addition, the minimum percentage of affordable housing units required in a development has jumped from 12 to 18 percent during that time. The Board of Supervisors will soon vote on whether to increase that requirement to at least 19 percent.
Mark Conroe, a managing partner with Presidio Development Partners, recently completed a 28-unit condominium project at 1598 Bay St. in the Marina district and is building a 160-unit rental building at 1699 Market St. But he said he has no plans to jump into any new projects.
“There are a couple of cracks in the dam,” he said. “Brokers will tell you, if they are being honest, that the market changed at the beginning of the summer. There is no question the condo market is going down.”
Plenty of developers are looking to sell sites where projects have been approved but construction has not started, he added.
“I question why anyone would start construction now,” Conroe said. “Before, you had to track down sites. Now, the seller tracks you down. My response is always the same: I am not a buyer. Revenues are going down and costs are going up.”
While groundbreakings will be rare in 2019, plenty of new units will hit the market next year because many of them were started about two years ago. The city expects that about 4,700 units will be completed in 2019, more than twice the 1,900 a year the city has averaged since 1990, and almost as many as the roughly 4,900 units that opened in 2016, the most productive year in recent history. About 2,300 homes in multifamily buildings were completed in 2018.
The biggest project opening in 2019 will be UCSF Housing at the Tidelands, on Minnesota Street at the northern edge of Dogpatch. The development is scheduled to open next summer and will allow the university to house an additional 708 students and medical interns, reflecting a 77 percent increase in its housing inventory, said Leslie Santos, executive director for housing services at UCSF.
“The cost of living in San Francisco continues to be a substantial part of the cost of education,” Santos said. “Being able to provide more housing, conveniently located near our campus at below-market rates, will be of significant benefit to UCSF’s recruitment.”
The next-largest project to open next year will be Avery 450, at 450 Folsom St. near the Transbay Transit Center. That complex — a 548-unit, 56-story tower — will have a bit of everything: 118 high-end condos, 280 market-rate rentals, and 150 affordable units, most of which are financed with public money.
Jonathan Shum, a vice president for developer Related California, said the first residents will move into Avery 450 in early summer.
Related California is also set to complete 1601 Mariposa, a 299-unit development in Potrero Hill. The project, which overlooks Jackson Park, will have three buildings, 10,000 square feet of retail, and a walkway from Mariposa Street to 18th Street, according to Gino Canori, the company’s chief development officer.
While rental complexes already in the pipeline will continue to open next year, new condo buildings will be scarce. Miles Garber, director of research for condominium marketing firm Polaris Pacific, said only 314 new condos will hit the market in 2019, compared with about 1,000 in 2018, 584 in 2017 and 1,427 in 2016. The average over the last decade has been about 800 units a year.
While middle-market projects are stalled, towers at the higher end of the price spectrum are still feasible, he said.
“Everything that is going forward is falling above the $2,000 (per square foot) price point,” Garber said. Projects with a projected price of $1,300 or $1,400 per square foot are not worth it to developers, he said. “In the short term, we are not going to see a lot of those delivered.”
The crop of condo projects opening next year will be dominated by smaller boutique buildings in established neighborhoods. These will include 44 units at 875 California St. in Nob Hill, 40 units at 901 Tennessee St. in Dogpatch, and 35 units at 1868 Van Ness Ave. in Pacific Heights.
Conroe — whose recently completed development at 1598 Bay St. fetched between $1,400 and $1,800 per square foot — said the market is strong for new for-sale buildings in neighborhoods like the Marina that don’t see much development.
“You have two kinds of buyers in San Francisco — the generic buyer and the specialty buyer,” he said, adding that the latter group wants to buy only in certain neighborhoods. “It’s like selling a Tiffany’s or a Bentley.”
Garber said he doesn’t expect to see condo inventory picking up until 2020 or 2021, and even then, most units for sale will be in super-luxury towers like 706 Mission and One Steuart Lane — which will open in 2021 — and Mira (160 Folsom St.), which opens in 2020.
Gregg Lynn, a Sotheby’s broker who focuses on the luxury downtown market, said his clients are still bullish and are eagerly awaiting the next generation of deluxe towers. “We have clients who have been waiting for (706 Mission St.) for 10 years,” he said.
He said the stock market’s recent dip has not hurt his business.
“If anything, it’s helped,” he said. “Our customers look at real estate as a more stable, alternative investment.”