1. real estate

SAN FRANCISCO, CA
MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
RED Capital Group | 1Q15 | May 2015
1Q15 PAYROLL TRENDS AND FORECAST
PAYROLL JOB SUMMARY
Total Payrolls
1,030.7m
Annual Change
45.3m (4.6%)
2015 Forecast
40.6m (4.0%)
2016 Forecast
34.6m (3.3%)
2017 Forecast
28.5m (2.6%)
2018 Forecast
16.5m (1.5%)
Unemployment (NSA)
3.5% (Mar.)
Construction was a notable area of relative softness. After hiring
OCCUPANCY RATE SUMMARY
Occupancy Rate (Reis)
96.5%
18th
RED 50 Rank
Annual Chg. (Reis)
+0.3%
RCR YE15 Forecast
96.3%
RCR YE16 Forecast
96.0%
RCR YE17 Forecast
96.6%
RCR YE18 Forecast
97.5%
Mean Rent (Reis)
$2,280
Annual Change
7.6%
2 nd
RCR YE15 Forecast
4.5%
RCR YE16 Forecast
3.9%
RCR YE17 Forecast
3.9%
RCR YE18 Forecast
1.9%
TRADE & RETURN SUMMARY
$5mm+ / 40-unit+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
additional employees at a 4,100-job 13.1% rate during the first half
2014, builders added to payrolls at only a 900-job, 2.6% y-o-y rate
during 1Q15. The slowdown was attributable to plateauing of
multifamily construction, which has reached a practical limit in
this metro’s challenging permitting and land cost environment .
RCR specified a 96.1% adjusted-R2 econometric forecasting
equation employing U.S payroll and metro personal income
growth; metro home price appreciation; S&P500 returns and 10year Treasury rates as independent variables. The model projects
two more years of 3% or faster growth before the San Francisco
growth curve returns to a more typical 1.5% - 2.0% trajectory.
Annual gains should approach 30,000 or more jobs through 2017.
1Q15 ABSORPTION AND OCCUPANCY RATE TRENDS
San Francisco apartment owners encountered seasonally strong
apartment demand during the first quarter as tenants leased a net
of 576 vacant units (Reis), topping the trailing 16-year and 5-year
January-March averages of 21 and 418 units, respectively. Supply
of 590 units was largely counterbalancing, however; holding sequential quarter occupancy steady at an average of 96.5%. Over
the year, average occupancy declined 30 basis points from 96.8%.
Axiometrics surveys of stabilized, same store properties recorded
a 96.2% average occupancy rate, down 20 basis points sequentially
but up 100 bps year-on-year. Class-A assets recorded the highest
occupancy (97.3%) and the largest year-on-year gain (140 bps).
Class-B properties followed with a 96.2% average, up 100 bps y-o-
y. The class-C segment posted the weakest results: 95.2% were
occupied after a 50 bps advance over the prior four quarters. As
vacant units in buildings constructed in 2014 and 2015 grew scarcer
(occupancy averaged more than 82% in 1Q), absorption decelerated. New units were absorbed at an approximate per property
average of 16 units/month, down from 20 units during 4Q14.
RCR’s occupied stock growth model employs apartment inventory,
payroll, rent and home price growth rates as independent variables.
The model projects that tenants nearly will keep pace with a wave
of supply anticipated for 2015-2017. Following the deluge, the model
expects demand to exceed supply, sending vacancy lower, perhaps
below the 2% threshold by 2019.
1Q15 EFFECTIVE RENT TRENDS
EFFECTIVE RENT SUMMARY
RED 50 Rent Change Rank
San Francisco establishments continued to hire new employees at
a breathtaking clip during the first quarter, adding workers to
payrolls at a 45,500-job, 4.6% annual pace, down slightly from
4Q14’s two-year high 47,800-job, 4.9% rate. Strong growth was
recorded across industries but none surpassed the City’s tech
and software sectors. Computer system design shop headcounts
grew 7,000 (13.7%) year-on-year, up from 4Q’s 5,700-job, 11.6%
advance as tech service firms, flush with VC cash and sky-high
implied market capitalizations, hired aggressively. Information
sector firms added another 5,000 workers (9.9%), in large part
due to growth in the software and social media markets.
7
$342.7mm
4.6%
$391,248
Expected Total Return
7.4%
RED 46 ETR Rank
14th
Risk-adjusted Index
3.45
RED 46 RAI Rank
39th
After a slow 4Q14 when average effective rent increased only $10
(0.5%) sequentially, trends rebounded during the winter: rents rose
$43 (1.9%) quarter-to-quarter, according to Reis. As a result, year
-over-year trends improved from 7.4% to 7.6%, ranking second
among the RED 50 after San Jose. The class-A sector was almost
entirely responsible for the surge. Segment asking rents increased
2.7% sequentially compared to class-B&C’s 0.4% advance.
Axiometrics also captured a sharp up move in rent trends in its
surveys of 131 larger properties. The service reported a 12.0% year
-on-year effective rent gain, up from 10.8% during the previous
quarter. This was the largest y-o-y advance posted in two years. In
this case, classes-B and –C provided most of the momentum, rising
12.4% and 13.0%, respectively. Class-A rents increased 8.9% yearon-year, reflecting a small seasonal sequential quarter decline
attributable to competition from substantial new supply.
Always a challenging market to model, RCR elected to structure a
simple model relying on payroll growth, the BAA corporate bond
yield and two lags of the dependent variable to achieve a 95.6%
ARS. The model projects strong rent growth in 2015, followed by
progressively weaker metrics in 2016-2018, primarily due to softer
job trends and higher interest rates. Trends rebound to more than
3% though in the fifth and sixth years of the forecast.
1Q15 PROPERTY MARKETS AND TOTAL RETURNS
Sales momentum was moderately slower during the first quarter
as buyers acquired seven 40-unit or larger properties valued at $5
million or more for total proceeds of $342.7 million. These metrics
compare to 11 transactions for $1.3 billion consummated during
4Q14, the latter figure boosted by the transfer of a 75% interest in
the large Parcmerced property.
The average price of units traded increased, reflecting the larger
concentration of recent construction mid-rise properties in the
mix. The average price per unit figure rose from 4Q14’s $320,875
figure to $391,249. The advance was attributable to the sale of
three properties built since 2011, which traded at prices ranging
from $549,000 to $663,000 per unit.
Cap rates mostly fell in the sub-5% range. Recent construction
trophies yielded buyers no more than 4%, and less in several
instances. Older class-B and –C assets traded at yields ranging
from the low 4% area to perhaps 4.75%.
Employing a 4.4% generic class-B purchase cap rate, a model
derived 4.9% terminal cap rate and model rent and occupancy
forecasts produces an expected 5-year, unlevered total return
estimate of 7.4%. The figure ranks 14th among the RED 46; first
among the Bay Area metros; and third among the “Magnificent
Seven” primary markets after New York and Seattle. Risk-adjusted
returns are hindered by above average model standard error,
limiting the risk-adjusted index to 3.45, 39th among the peer group.
MARKET OVERVIEW | 1Q15 | SAN FRANCISCO, CALIFORNIA
San Francisco Occupancy Rate Trends
Source: Reis History, RCR Forecasts
Average Occupancy
99%
99%
RED 46 AVERAGE
SAN FRANCISCO (REIS/RCR)
98%
98%
98.4%
96.5%
97%
96.3%
97%
97.5%
96%
96.0%
96.6%
96%
95%
95%
94%
94%
2012
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20f
San Francisco Absorption and Supply Trends
Units (T12 Months)
Source: Reis History, RCR Forecasts
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
-500
2012
ABSORPTIONS
COMPLETIONS
2013
2014
2015f
2016f
Average Cap Rate
2019f
1Q20F
Source: eFannie.com, RCR Calculations
PACI F I C R EGI ON
SAN FRANCISCO
6.0%
6.0%
6.0% 5.4%
5.5%
2018f
San Francisco Cap Rate Trends
7.0%
6.5%
2017f
5.6%
5.5%
5.2%
5.3%
5.5%
5.7%
5.9%
4.3%
5.0%
5.0%
4.2%
4.5%
4.0%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
NOTABLE TRANSACTIONS
Property Class/Type
(Constr.)
Approx. Date of
Transaction
Total Price /
(in millions)
Price /
per unit
Estimated
Cap Rate
Parcmerced (West SF / lake Merced)
B / HR (1944)
10-Nov-2014
$1,310.0
$406,706
6.5%
Skyline Heights (North San Mateo / DC)
C- / GLR 1974
28-Feb-2015
$74.0
$288,984
5.8%
MODE by ALTA (Cent. San Mateo / Hillsdale)
B / GLR (2014)
4-Mar-2015
$73.6
$663,288
4.1%
Etta (Civic Center / NoMa / Lower Nob Hill)
A- / HR (2013)
In Process
NA
Approx. $925,000
3.9%e
Property Name (Submarket)
RED Capital Research | May 2015
MARKET OVERVIEW | 1Q15 | SAN FRANCISCO, CALIFORNIA
San Francisco Effective Rent Trends
YoY Rent Trend
Sources: Reis, Inc., Axiometrics and RCR Forecast
14%
12%
10%
8%
6%
4%
2%
0%
-2%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
RED 46 AVERAGE
SAN FRANCISCO AXIOMETRICS SAME-STORE
SAN FRANCISCO (REIS/RCR)
7.6%
4.5%
4.2%
2012
2013
2014
2015f
2016f
4.2%
2017f
2018f
1.9%
2019f
2.9%
1Q20f
San Francisco Home Price Trends
Source: S&P Case-Shiller and FHFA Home Price Indices and RCR Forecasts
YoY Growth Trend
30%
30%
U.S. FHFA HPI
SF / OAK S&P C-S HPI
SAN FRANCISCO FHFA HPI
25%
20%
15%
10.6% 9.8%
25%
20%
15%
8.7%
10%
5%
10%
6.2%
4.0%
3.5%
5%
0%
0%
-5%
-5%
2012
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20f
San Francisco Payroll Employment Trends
Source: BLS, BEA Data, RCR Forecasts
YoY Growth Trend
6%
6%
4.6%
5%
5%
3.5%
4%
4%
3.2%
3%
2.2%
2%
1.2%
3%
1.3% 2%
1%
1%
0%
0%
US GDP GROWTH
-1%
2012
2013
2014
US JOB GROWTH
2015
2016
SAN FRANCISCO JOB GROWTH
2017
2018
2019f
-1%
1Q20f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been
independently verified or accepted by RED Capital Group. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information
gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED Capital Research | May 2015
MARKET OVERVIEW | 1Q15 | SAN FRANCISCO, CALIFORNIA
SUBMARKET TRENDS (REIS)
Effective Rent
Submarket
Physical Vacancy
1Q14
1Q15
Change
1Q14
1Q15
Central San Mateo
$2,128
$2,267
6.5%
2.1%
2.9%
80 bps
Civic Center / Downtown
$1,710
$1,940
13.5%
3.2%
5.3%
210 bps
Haight Ashbury
$2,297
$2,365
2.9%
3.2%
3.4%
20 bps
Marina / Pacific Heights
$2,446
$2,698
10.3%
1.6%
1.9%
30 bps
North Marin
$1,607
$1,820
13.3%
1.3%
1.3%
0 bps
North San Mateo
$1,782
$2,088
17.2%
3.4%
2.7%
-70 bps
Russian Hill / Embarcadero
$2,822
$3,083
9.2%
2.0%
1.7%
-30 bps
South Marin
$1,936
$2,026
4.6%
1.5%
2.3%
80 bps
South San Mateo
$1,839
$2,013
9.5%
2.0%
2.5%
50 bps
South of Market
$2,546
$2,682
5.3%
4.9%
7.4%
250 bps
West San Francisco
$2,047
$2,166
5.8%
3.7%
3.4%
-30 bps
$2,119
$2,280
7.6%
3.2%
3.5%
30 bps
Metro
Change
SFR Annual Compound NOI Growth Probability Distribution
0.05%
3.8%
16
10.50%
92.9%
3.3%
14
12
San Francisco
10
Minimum -8.95%
Maximum 16.0%
Mean
5.31%
Std Dev
2.89%
Values
10000
8
6
4
2
16.0%
10.5%
5.0%
-0.5%
-6.0%
14%
10%
6%
2%
-2%
0
FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT:
Daniel J. Hogan
Director of Research
[email protected]
+1.614.857.1416 office
+1.800.837.5100 toll free
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