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San Francisco Eases Regulations to Bring Residents Back

Plus: As office markets falter and apartment rent growth decelerates, developers turn their attention to niche industries.

San Francisco Eases Regulations to Bring Residents Back

Plus: As office markets falter and apartment rent growth decelerates, developers turn their attention to niche industries.

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Good morning. San Francisco boosts apartment construction and relaxes regulations to tackle its housing crisis. Florida developers eye aerospace sector for lucrative warehouse projects. Meanwhile, Richmond and San Jose anticipate a 4% rent growth in 2024.

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Market Snapshot

S&P 500
GSPC
4,594.63
Pct Chg:
0.6%
FTSE NAREIT
FNER
702.39
Pct Chg:
0.9%
10Y Treasury
TNX
4.195%
Pct Chg:
-3.3%
SOFR
1-month
5.33%
Pct Chg:
0.0%

*Data as of 12/05/2023 market close.

HOUSING SHORTAGE

San Francisco Is Building to Bring Residents Back

San Francisco Is Building to Bring Residents Back

PHOTO: PICKARD CHILTON ARCHITECTS

San Francisco is undergoing a major transformation in its approach to housing development. This shift involves easing regulations and repurposing spaces in response to its affordability crisis and the effects of the pandemic.

Expanding residential: A notable example in this transformation is Bayhill Ventures' announcement of a 71-story rental tower in the city's financial district, representing San Francisco's most ambitious residential project in years. Additionally, plans for converting 10 office buildings into residential spaces are underway, potentially adding over 1,250 units to the city's housing stock. These initiatives are a response to the government's efforts to lower construction costs and streamline the building process.

Policy shift: San Francisco and California officials are modifying existing policies to encourage housing development. Recent changes include relaxing rules for building market-rate apartments and reducing requirements for environmental and other reviews for multifamily projects. While these changes have caused some concern among affordable housing advocates, they recognize the necessity to stimulate the broader housing market. A proposed $300 million housing ballot measure aims to compensate for potential losses in affordable housing resources.

From offices to resi: San Francisco faces a significant surplus of office space, with vacancy rates reaching 25% in November, a stark increase from around 5% in the last quarter of 2019, as per CoStar's data. Meanwhile, the city's attention is shifting more towards residential development, as the rental apartment sector shows a stronger recovery than other commercial real estate areas. This shift is evident as apartment vacancies decreased to 7% in November, down from a peak of 12% in 2020 during the height of the pandemic.

➥ THE TAKEAWAY

Optimistic outlook: San Francisco's approach marks a pivotal shift in urban development, prioritizing residential projects over commercial properties to revitalize the city's core. The proposed Bayhill tower and other projects symbolize a new era for San Francisco, where flexibility in urban planning and a focus on residential needs are key to addressing the housing crisis and economic recovery.

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TRENDING HEADLINES

  • Contrarian opinion: Metlife (MET) dismisses worries surrounding CRE and maintains an optimistic outlook for office occupancy recovery.

  • Housing havoc: Toronto home prices slid for their fourth straight month, down 1.7% in November, adding up to a total decline of 4.8% since July.

  • Westward leading: A Florida-based investor spends over $81M on two Fort Worth warehouses, adding to their 3 MSF of real estate.

  • Crystal ball: The National Association for Business Economists predicts slower growth for the US economy, with a 1% slowdown by the 4Q24.

  • Mixed signals: Multifamily starts in the US fell 31.8% from October of last year, but rose 4.9% since last September.

  • Risky business: Florida builders still construct wood homes despite concrete being more reliable in hurricanes, due to cost and speed.

  • Self storage shakeout: Self storage investment is cooling as rents drop 10% and the number of US facilities reaches 50K.

  • Rent scams soaring: Renter application fraud, fueled by social media platforms like TikTok, is rising, costing landlords millions in unpaid rent due to lax enforcement.

  • Follow the lawyers: Dallas-based developer Timothy Lynch Barton and associated entities were ordered into receivership by a federal judge, facing fraud charges.

  • Casino licensing chaos: The US attorney's office and Chicago's inspector general are investigating the process by which Bally's won its casino license.

  • Suriving and thriving: Residential brokerages, special servicers, and developers managed to survive and profit in the challenging real estate market of 2023. Here’s why.

  • The Great Park Battle: Texas is no longer trying to seize a 5K-acre property in Freestone County, including a former state park and a lake, from a developer.

OUT OF THIS WORLD

Florida Real Estate Firms Target Aerospace Sector for Growth

Real-Estate Developers Chase Outer Space Business in Florida

Cape Canaveral in Florida. PHOTO: MIGUEL RODRÃGUEZ/ZUMA PRESS

Real estate developers in Florida are adapting to changing market conditions by targeting niche sectors, with a particular emphasis on the aerospace industry.

T minus 10: Hines, in collaboration with local developer Key Group, is investing $500 million in an industrial park designed to accommodate the aerospace industry's unique needs. The project aims to cater to companies like Blue Origin and SpaceX, offering high-rent warehouses and manufacturing space for storing rockets, space shuttles, satellites, and related parts. The investment reflects a growing trend among real estate developers to explore new opportunities beyond traditional sectors, with some even venturing into data center construction to capitalize on artificial intelligence's expansion.

Growing demand: Cape Canaveral, a historically quiet coastal region, is witnessing transformation due to the space industry's expansion. Hines and Key Group's project covers a 450-acre property in Titusville, close to the Cape Canaveral launch site. They plan to start construction in early 2024 and complete the initial phase by 2025.

Why now? This development is part of a larger trend where companies are scrambling to secure warehouse space in the area, leading to an increase in rent prices. “It is very tough to find space out there right now,” said David Murphy, an executive vice president at real-estate brokerage CBRE. That makes the area appealing to developers despite higher interest rates, which have pushed up the cost of buying and building real estate. The total space planned for the project is around 3 MSF, catering to a market with a current shortage of suitable facilities.

➥ THE TAKEAWAY

Thinking outside the box: Despite challenges like high interest rates and stringent lending conditions, the scarcity of available space near Cape Canaveral is attracting real estate developers to move from traditional investments to specialized, high-demand sectors. This trend is evident with firms like Hines, Key Group, Onicx Group, and Aries Capital actively pursuing large-scale developments to meet the unique needs of the space industry.

SUNNY FORECAST

Richmond, San Jose Predicted to Lead Rent Growth in 2024

A recent report from RealPage predicts that Richmond, VA, and San Jose, CA, are poised to be the nation’s rent-growth leaders in 2024, with both cities expected to see a rise of 4%.

Projected rent growth: Among the top performers are San Jose and Richmond, with rent growth projected at 4.0%, followed by West Palm Beach at 3.9%. Other markets with strong projected growth include Anaheim, Pittsburgh, and San Francisco, all above 3.4%. These figures reflect robust local income growth driving rental price increases.

Occupancy rates: In terms of occupancy rates for 2024, Newark, NYC, Boston, and Riverside should stay strong with occupancies over 96%. These markets benefit from limited housing supply and dense populations, ensuring high occupancy. Meanwhile, LA, San Diego, and Anaheim are also expected to enjoy occupancy rates above 96%.

New supply: Dallas leads in new supply, with nearly 38K units currently underway, surpassing 2nd-place Phoenix's 33,362 units. Other top construction markets include Austin, Denver, Charlotte, and LA, each with over 20K new rentals expected to be delivered in 2024. Atlanta, Houston, and Raleigh/Durham also anticipate over 20K new units.

Local income growth: The correlation between local income growth and rental price increases is a significant factor in determining rental prospects. Higher local incomes create demand for housing, which in turn drives up rental prices. Richmond and San Jose are prime examples of this trend, where strong economic performance and job opportunities fuel rental market growth.

➥ THE TAKEAWAY

Brighter by the day: Despite external forces, demand for apartments remains strong, driven by job growth and population increases. The forecast for rental markets in 2024 looks promising, with Richmond and San Jose, predicted to lead national rent growth at 4%. Dallas, Phoenix, and Austin continue to attract residents and jobs, resulting in sustained multifamily demand. Fast-growing markets like Charlotte, NYC, and Denver will also benefit from this trend.

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CHART OF THE DAY

In-Store Sales Rise Across Most Major Property Types

Over the past 12 months, major US retail sectors saw higher YoY PSF sales, with the exception of craft, services, dollar stores, apparel, etc. Meanwhile, home goods outperformed the rest of the pack by a huge margin, with beauty supplies coming in at a distant second, followed by fitness, sporting goods, and movie theaters. Also, the higher YoY PSF sales growth was, the lower occupancy costs became.

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