Starboard Commercial Real Estate

Hans Hansson | March 26, 2007

Right now in San Francisco, 30,000 condos are in the planning, permitting, or construction stage-at the current pace, these units will enter the market in the next five years. These projections do not include extremely large high-rise projects exceeding 100 stories in Rincon Hill or a 62-story condo project planned on the site of the parking lot at the Palace Hotel. If all these units are actually built, life as we know it in San Francisco will be seriously affected.

The rule of thumb in condo development is that 1.5 people are needed to support each condo unit. Using this metric, San Francisco would need 45,000 new residents to absorb 30,000 units. San Francisco's population hit a high point in the early 1960s at about 800,000. It dipped to 695,000 by the early 1970s as families exited the city for the suburbs. The population today is 792,000. If all these proposed condos sell, we will be looking at the highest population in city history.

The dramatic increase in population will have a ripple effect. Traffic, retail, and service needs will increase, leading to new urban parks, potential mass transportation redesign, new industrial building stock, and new office market stock. Jobs will be needed to support the new residents. The city's office space market is already facing single-digit numbers for the first time since the dot-com days. Prices are rising and are poised to continue to increase dramatically over the next several years. What if companies decide that prices are too high to do business in San Francisco and pull out? A tailspin could lead to a dovetail in residential sales and office building rental rates.

Condo development is occurring in all major U.S. urban markets. The cost of building a high-rise condo is similar to the cost of building office space, but the return on condo development is far greater, so more condos than office buildings are being built in core downtown financial districts. In the best scenario, office development and residential development balance one another. Yet, a free market does not always create such a balance-at least not immediately. Although some new office buildings are scheduled for construction in San Francisco, these projects are years away from meeting the demand for new office space we face in the near future.

San Francisco is not like every other city in the United States; its boundaries are fixed at seven miles by seven miles. A huge influx of residents will create many challenges that are not addressed in current long-range plans.
Posted 12 years, 10 months ago on March 26, 2007
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