Below are my thoughts on an an article Bloomberg recently published titled “Manhattan Apartment Landlords Prop Up Market With Incentives.”

The real estate market is really 10-20 different markets, that are influenced by a plethora of different factors.  For example, the market for renters and landlords is different than the commercial market.  The residential starter home market is different than the high-end luxury market.   There are some common threads, but there are unique factors that set determine pricing for each type of property whether it is for sale or for rent.

San Francisco Market

Let’s look at the rental market in San Francisco for example.   Companies like Google, Apple and Facebook decided in 2008ish that rather than pay for more parking at their headquarters in Silicon Valley, they would start operating (internet enabled) luxury buses from San Francisco.   Smart move.  Now their employees can work another 2 – 2.5 hours while commuting and no new parking garages needed.   Pay for their dinner at HQ and now they will come home by 10 pm.   This in combination with increased VC funding in SF and a new high-tech boom put upward pressure on rents in the 2012-2015 timeframe.    Several high profile companies like Salesforce and Twitter expanded their SF footprint to attract millennials that had no interest in living in the valley.    Typically rents rise in conjunction with rising wages and the population of renters.  As wages of tech workers in SF rose and these SF-based startups firms grew, rents rose in response.  

Other Factors

There are other factors which turbo-charged these increases, but they both relate to a basic supply and demand argument.  With the 2008 recession, many new construction projects (both for income property and for the resale market) were mothballed.   Permits went stale, credit was nowhere to be found, and projects did not pencil out.    There was no pipeline of significant new housing when things started turning around in 2012.   Second, rent control in San Francisco has an impact on the supply of rental units that turnover to market pricing.  A huge swath of San Francisco is enjoying artificially low housing costs due to rent control and these units are simply too good a deal to move out of.   With fewer units turning over, the market is then determined by a small supply of units coming to market.   Airbnb’s business opportunity for apartment owners restricted supply further as landlords kept their units for short-term rental vs  permanent rental housing stock.   


Ironically these higher market rents jump-started the construction boom that we have recently experienced.  Developers dusted off their old projects and started building based on the new market rents of >$4 per square foot.   This response was not immediate, however.   Entitling projects in San Francisco can take 2-5 years and while shovel ready projects got started, it was not until 2015-2016 that we saw a significant number of units coming to market.   Finally, in Q4 of 2016, you are starting to see rents drop in response to these new units coming to market and some other market forces.

Lower Rent?

Contributing factors to lower rents also potentially include a lack of new VC funding in the high-tech sector, a belt-tightening amongst the current VC backed companies, and a lack of any IPO’s that would put real cash in employees pockets.   The uncertainty around the election and the negative rhetoric of the campaign may also have contributed.  In SF we also saw the enactment of two pieces of legislation that may begin to have an impact on the supply side.  The new Airbnb law limiting Airbnb rentals to just 90 days with more severe penalties for landlords may turn these units back to the (permanent) rental stock.  The new accessory dwelling unit program, allowing homeowners to create new units in unconditioned space, may also increase the supply of housing.

Similar factors are in play in markets like New York City and Philadelphia.   In markets where there are fewer regulations and hurdles to build and are home to industries less prone to boom and bust with no rent control ordinances, rents probably did not rise much and will also probably not fall (as) much.

In terms of the market for people looking to buy homes – this market is influenced by many of the same factors that influence the rental market.  Supply and demand, the local economy, and the (rising) incomes of local residents are major factors in determining the price of homes and apartments.  People make mortgage payments on their home purchase based on interest rates and their incomes.  In a declining interest rate and rising income environment, asset prices will rise.   Combined with a limited supply of new homes due to the recession and long approval timelines for new construction, the impact on asset prices was amplified.  

Factors that Impact the Market

If we have increased inflation and we are now at full employment, wages will probably continue to rise which will lead to higher prices as people can allocate more of their income towards housing.   However, higher interest rates will cause a bigger chunk of that payment to cover interest which will have a dampening effect on prices.   Then there is the housing pipeline (supply) and the local economy which are also determined by commercial rents and the ability of firms that actually grow their business in San Francisco.     I think there are too many pieces of the puzzle to say with certainty which way things will go.    We potentially have two large IPOs in 2017 (Uber / Airbnb) which would mint a large number of millionaires who may be looking to improve their housing situation.  The SF market is small enough that these types of events could have a significant impact on the real estate market.  (Palo Alto is a good case study with the Facebook IPO.)


What will make millennials stay in your buildings/want to buy your property? Today’s renters/buyers have grown up with a different mindset than older generations… So what makes them tick?

For many millennials, especially the ones that work in high-tech, it’s a subscription lifestyle.    They own little, and they rent their homes, their transportation, and their music on a monthly basis.    They eat out or eat at work. They are social, and they don’t mind living with roommates.   This does change when couples move in together and start a family.  A growing family typically signals a change in housing needs (closer to school, need a yard, closer to grandparents, etc).  In San Francisco, because the cost of housing is so high, these decisions are delayed.   Where a young couple may buy a starter home in other parts of the country in their early 20’s, in San Francisco you really need a rich uncle or a liquidity event to be able to afford the down payment on a piece of the city.  I strongly believe that a large percentage of the millennials that call SF home now will seek to stay in the city – even with the higher costs of ownership.   They are not particularly interested in having a large home in the suburbs and are more interested in being part of the fabric of what a city has to offer.  I believe the tiny-home movement is a representation of this phenomena.