Global Investing Increases, San Francisco Decreases
The San Francisco metro market volume actually fell by 18% from $31.9bn to $26.2bn year-over-year, landing at sixth place this year compared to its ranking of third in the world the previous reporting year.
SAN FRANCISCO—Despite geopolitical uncertainty and a slowing in the economic cycle, investment in the global property market had a significant increase of 18% year-on-year to a new record high of $1.8tn, from 2017’s $1.5tn. This finding is according to a report from Cushman & Wakefield titled Winning in Growth Cities.
The report, which also drew upon sales data supplied by Real Capital Analytics, spanned the 12 months from July 1, 2017 to June 30, 2018 (or third quarter 2017 through second quarter 2018). The report also ranked the top investment markets in the world during this period in the following order: New York, Los Angeles, London, Paris, Hong Kong, San Francisco, Washington, DC, Tokyo, Dallas and Chicago.
And while global property showed a collective increase in investment volume of 18% year-over-year, the San Francisco metro market volume actually fell by 18% from $31.9bn to $26.2bn year-over-year. This decline also led to San Francisco falling a few slots at the global level to sixth place this year, compared to its ranking of third in the world the previous reporting year.
Northern California’s top metro market was surpassed this year by all three non-domestic markets, London, Paris and Hong Kong, respectively. However, indicative of its longstanding desirability and magnetizing attributes, San Francisco (its boundaries consist of the Greater Bay Area for this report) did maintain its third place status within not only the United States but also all of North America, again trailing only New York and Los Angeles, which respectively remained as the top two global cities.
Most of the decline in San Francisco metro investment sales for this latest 12-month reporting stretch was attributable to the office sector where most trophy product had traded earlier in the cycle. During the last several years, there has been a shift toward ground-up development versus acquisition of existing properties.
Meanwhile multifamily sales remain at historically high levels, despite softness in the area’s high-rise market and the potential repeal of the Costa Hawkins Rental Housing Act (rent control law). Retail has certainly softened compared to 2017, but that trend is no different from many other areas in the country. However, industrial sales activity in San Francisco has been accelerating and remains at or near historic highs.
While overall volume in San Francisco did decline noticeably this period, it is very important to point out that investment sales were actually up in the first half of 2018 compared to the first half of 2017. The annualized comparison in the global report, however, revealed weakness because the second half of 2016 was much stronger than the second half of 2017.
Conversations with investors point to increased focus on West Coast markets from foreign capital, which should in time translate to greater acquisition activity. Mainland China capital will possibly remain on the sidelines for the foreseeable future, but domestic institutions and other foreign capital may well see this as an opportunity.
The unmatched depth and breadth of innovation sectors in the Bay Area give rise to network effects that are unmatched elsewhere. This drives the economy and real estate values in the Bay Area. These effects seem only to be deepening over time, though increasingly there are competing centers both within the US and internationally. This position places an effective floor under both investment activity and pricing in the Bay Area, according to the report.
“What makes the Bay Area special is the depth and breadth of its technology center compared to anywhere else in the world,” David Bitner, Cushman & Wakefield Americas head of capital markets research, tells GlobeSt.com. “I emphasize depth and breadth because in innovation sectors, there can be large difference between having a person in a position in which they can be good and another in which they can be great. Having a deep talent pool and a wide range of opportunities for that talent pool means that this matching process is optimized more often. When this happens, the company succeeds, the worker succeeds and indeed society gains as well.”
Bitner goes on to explain that this is an example of a network effect which deepens as time goes on. Economically, this manifests as faster growth in expansions and limited job losses in downturns compared to regional economies without these benefits.
The implication for real estate investors is that in an adverse economic scenario, losses are likely to be capped and temporary, he says. Inadequate infrastructure and housing pose a more serious threat to the market’s health as those constrain the holding capacity of the region.
“On the margin, this benefits global and national competitors for technology companies and talent, which are seeking to build their own network effects and hope in time to catch up to the Bay Area,” Bitner tells GlobeSt.com.