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Where to Invest in the San Francisco Bay Market

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Don’t put them all in the same basket.

As the center of the tech universe, the Bay Area, particularly San Francisco, is continuously in the news for its soaring real estate prices.

If the news reports are to be believed, San Francisco housing prices are so out of control, even those making more than $100k a year at many of these big, high tech firms can’t afford to live in the same city in which they work.

From a recent businessinsider.com article, McCamy, Laura (Jun. 6, 2019), 11 Facts about San Francisco’s Housing Market that will Make You Glad You Live Somewhere Else, retrieved from https://www.businessinsider.com, the following were listed as some crazy facts about the out-of-control San Francisco housing market.

  • You’ll need to earn at least $172,000 a year to afford a home in San Francisco. Curbed San Francisco reported that buyers need an annual salary of at least $172,153 to keep up with mortgage payments in San Francisco.
  • According to PayScale, the average salary in San Francisco is around $88,000.  Even a senior software engineer makes just $141,554 on average, according to the PayScale data – not enough to buy a house in San Francisco.
  • The San Francisco Chronicle found that just 18% of households in the Bay Area have enough take-home pay to afford to buy a median-priced home.
  • Some residents are living in houseboats, vans, and RVs as housing alternatives.
  • The median rent for a one-bedroom apartment in San Francisco hit almost $3,700 a month in 2019.
  • The median sales price for a two-bedroom home in San Francisco has increased by 329% since 2000.
  • The typical price of homes listed in San Francisco is $1.3 million – 4.4 times the typical national price of homes listed.
  • The most expensive condo ever sold in San Francisco went for $15 million in 2018.
  • The most expensive home on the market in San Francisco is listed at $45 million.
  • Condos in a building that’s sinking are still selling for over $2 million.  The Millennium Tower, a 58-story building, has sunk almost a foot and a half since it opened in 2009 and it tilts 14 inches.
  • High home prices in San Francisco have had the effect of scaring away investors fearful of ending up holding the bag rather than striking it rich with bubble concerns on everybody’s minds.

Scared away from overvalued markets like San Francisco, Seattle, and Miami, investors are turning to mid markets where home prices are not grossly overvalued and have yet to peak.

As residential investors are fleeing San Francisco, should investors in other classes of real estate do the same?

After all, residential real estate; including single-family, townhomes and condos, only represents a fraction of the investable real estate universe.

Commercial real estate; including multifamily, office, retail, hotel, industrial and special purpose, offer a range of alternatives to residential real estate and are not directly correlated to the same market conditions.

Residential real estate assets are dependent on lending guidelines and the availability of quick and easy home loans.

Therefore, just because the opportunities for profit in the residential San Francisco market seem bleak, the same may not hold true for office and multifamily where arbitrage opportunities still exist for experienced investors with boots on the ground.

When you think about real estate, don’t lump all classes together.

Each one is unique, and all are not necessarily tied to the same market conditions.  In fact, some may move in opposite directions.  For example, in a downturn, while high end and mid-level residential real estate may take a hit, affordable multifamily typically sees an upswing.  That is only one example.

Our advice is to evaluate each class and opportunity on its own merits and don’t make any pre-judgments based on what’s going on with another class of real estate.

There are still plenty of lucrative opportunities in the San Francisco market, and while single-family residential will drive the headlines, it’s not what most affluent investors are choosing for their investments.  Commercial real estate dominates their portfolios.