Alan Mark Mark says the San Francisco market is far from oversupplied.

SAN FRANCISCO—Alan Mark, president of The Mark Company, discusses the underlying trends that are driving the current multifamily market, and the continued impact in 2016 and beyond, in this EXCLUSIVE. There have been a series of articles during the past two weeks about the challenges facing the state of the San Francisco residential real estate market. What is your take on that?

Alan Mark: The fact is that the demand for urban housing remains strong. Despite reports that there are 62,500 residential units in San Francisco’s pipeline, the market is far from oversupplied. And while nearly 1,000 new construction condominium units are still scheduled to enter the market this year, buyer demand is expected to remain strong. This is evidenced by three developments recently launched by The Mark Company. Located in Hayes Valley, 450 Hayes placed more than 80% of its homes into contract within one month at an average price of more than $1.2 million, while 388 Fulton put 25 homes into contract during its first three weeks. The Harrison launched in early April and welcomed more than 170 onsite visitors its first week on the market, proof of pent-up demand for luxury product in one of the city’s most in-demand neighborhoods of Rincon Hill. Can you discuss your research findings for first quarter 2016 and what’s ahead?

Mark: As we move forward this year, the market will not experience the fever pitch we have become accustomed to, but it will remain stable. Absorption was steady during the first quarter of 2016 and slightly better than fourth quarter 2015. The Mark Company’s San Francisco Condominium Pricing Index for March, our proprietary method for tracking new construction pricing, increased every month during the first quarter and was the same as it was during the same period last year. Is it true that the San Francisco market is recalibrating and expectations are adjusting?

Mark: There has certainly been some adjustment of expectations in the market. The theme that permeates all sectors of the economy is normalization, which reflects that markets are maturing and relieves the fears of frothing that have recently concerned many. The region’s economic strength originates from the exceptional job growth during the last four years, and the Bay Area still outperforms the rest of the country, with approximately 120,000 jobs created locally during the past year. What about the chronic undersupply of new product and a critical need for housing in San Francisco?

Mark: The constrained supply of immediately available inventory, with approximately 633 units available in San Francisco at the end of first quarter marks an 80% decrease compared to the peak of more than 3,000 units reached in 2007. We are far from oversupply today or will be within the next five to 10 years. Of the more than 36,000 approved residential units, 28,000-plus are contained within large, master-planned communities with no timeline for delivery or guarantee that they will come to fruition. There is continuing demand for new construction, with more than 80% of the under construction pipeline slated as rentals. We’ve seen developers back off from delivering condominiums in favor of rentals, only to rush back to a condominium scenario when the market shows signs of improvement. Even with potential product in the pipeline, San Francisco will most likely not have 1,500 units on the market at any given time through this decade. A number of towers that are planned, but not fully entitled, will take three years to build when they do start construction. What are some of the strategies for success in a shifting market?

Mark: There are pockets of opportunity for specific product types, buying groups, neighborhoods and price points. These strategies include realistic pricing, as buyer burnout over sky-high prices is a reality, as well as a strong understanding of the competition, with regard to price, product and target buyer overlap and incentives. An additional component is utilizing deep buyer insight with regard to preferences, demographics and psychographics when bringing new product to market. Final thoughts?

Mark: The Mark Company believes that the outlook for the rest of the year remains positive, with strong real estate fundamentals driven by positive job growth and continuing demand by homebuyers to live in urban cores.