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Uncategorized Some strange rumblings in the SF economy

Some strange rumblings in the SF economy


Too much office space — or too little? Is the rent too damn high even for tech workers? Is it time to take a little break here?

So many new luxury condos that maybe even tech workers can't afford ... what's going on here?
So many new luxury condos that maybe even tech workers can’t afford … what’s going on here?

By Tim Redmond

MAY 27, 2015 – I keep hearing strange rumblings these days about the San Francisco economy, stuff that ought to be grounds for at least some discussion in the public sphere.

For one thing, while the mayor and some in the tech industry complain about a lack of office space in the city (and developers are converting industrial space to offices, often without permits, as quickly as they can), the SF Business Times is reporting that there’s a glut of space coming on the market as existing companies either consolidate or decide SF is too expensive and go somewhere else.

As more companies ditch their office spaces, it raises alarms for a potential commercial real estate downturn, as I detailed last month. Those alarms may blare more loudly now that these potential listings put sublease space at about 1.7 million square feet, San Francisco’s highest total since the tail end of the recession in the last quarter of 2009.

Me, I don’t see a commercial real-estate downturn as any cause for alarm; cheaper office space might mean less of a land grab for what is now Production, Distribution, and Repair space.

But it’s worth talking about in light of the fact that I’m hearing lots of talk about the Prop. M development limits and how they might “stunt” the job market.

There’s too much office space? No, there’s not enough. Whatever: Prop. M brought an immense amount of sanity to the commercial office market in San Francisco. At the time it passed, in 1986, office towers were springing up everywhere, driving out other possible uses for scarce space (like, for example, housing) – not because there was such a demand for offices but because a glut of investment capital was fueling an unsustainable boom.

The market eventually crashed, and cities that didn’t limit office development (like Houston) were hammered. SF survived better than most because we made sure all of our economic eggs weren’t in a single basket.

And if we hit the Prop. M cap, and things have to slow down a bit, then they ought to slow down. It’s a good early warning system of a bubble out of control.


And so, maybe, is this.

You know the press is going to have fun with a headline that says “Even techies can’t afford the Bay Area anymore,” but there’s something to think about here. When housing gets so expensive that even the higher-paid workers want to go somewhere else – and lots and lots of middle-income workers are leaving in droves – there’s a certain hollowing out of a city.

Nearly all of the new housing under construction is aimed at the luxury market. That’s not because San Franciscans have a pent-up desire for high-end housing; it’s because that’s where international capital is going.

Same as the 1980s with the highrise office buildings. The ones that Prop. M kept a bit under control.

The Chamber of Commerce howled about Prop. M in 1986, and developers spent a fortune to try to defeat it. In retrospect, it was good for the economy.

Just as a bit of a limit on luxury housing, which isn’t apparently serving the needs of anyone except speculators and investors, could turn out to be good for the city.

In unsteady times (I didn’t say “bubble,” but lots of other people are) sometimes it makes sense not to be irrationally exuberant. Sometimes it makes sense for a city to slow things down a bit, take a breather, and let the stardust settle.

And now I’m heading out to see what the DCCC thinks about this idea.

Tim Redmond
Tim Redmond has been a political and investigative reporter in San Francisco for more than 30 years. He spent much of that time as executive editor of the Bay Guardian. He is the founder of 48hills.


  1. It is my understanding that without the taxpayer bailout, the American financial system would have collapsed, taking the entire world with it. The Chinese have been investing in “The Golden Mountain” for centuries. However, the Bay Bridge Boondoggle proves that international trade has it’s limits.

    The “strong” dollar is fine if you have have enough of them to trade for foreign goods or vacations; basically a wheelbarrow full. What can you buy that was produced domestically that is high quality and reasonably priced? Nothing. The decline in purchasing power means that adjusted for inflation, todays dollar is actually only worth $0.05.

    Russia, China, Brazil, India, and Iran all have economies that are growing. These countries represent the future, and are moving as fast as they can away from the dollar.

  2. Few countries have restrictions on non-citizens buying property. Switzerland and India are the only ones I can think of, and China only imposed moderate limits in 2010, our peers in the EU or Japan don’t impose any restrictions.

    Nonresident foreign investors buying properties is not necessarily a problem per se, as long as they rent out the units and don’t leave them vacant. In London, there is a huge property price boom driven by Middle Eastern and Russian investors, but rents have not gone up anywhere as much. San Francisco’s housing pathologies have a different root cause, primarily NIMBYism restraining supply.

  3. I don’t have hard numbers, but from talking to realtors, many of the overseas Chinese buyers are making all-cash offers, thus there is no banking credit involved.

    Low interest rates are certainly contributing to driving the prices up for American buyers who pass the eligibility requirements for a jumbo mortgage. While rates have crept up from 2012, they are still historically low and banks are also much more likely to approve a mortgage than 2 years ago. That reflects the Fed’s policy of easy money, but taxpayers are not on the hook for that. The main risk is devaluation of the dollar, but Europe and Japan are in even worse straits and the “worthless dollar” is doing quite well against the Euro, Yen and Sterling, thank you very much.

    If I were the Chinese, Japanese or Korean government, i would certainly be eager to trade in my dollars into equity or real estate assets, but whenever the Chinese try to make a major acquisition like Amoco, it is blocked on more or less spurious grounds. The Persian Gulf petromonarchies have a deal with the US – they park their money in US dollars, and we provide them protection from their own populace. They have been buying a lot of property in Europe, but not so much on the West Coast AFAIK.

  4. I went to quite a over a hundred open houses last year. The main foreign language I could hear was Chinese, with a little bit of Russian.

    As for taxpayers’ money, I don’t follow, unless you mean Afghanistan where the money presumably comes from embezzled US aid dollars. One out of 4 SF households has over $1M in financial assets beyond their home, there are a lot of rich people in this city, and more want to come in, which is why the demand for high-end condos is high. Tech workers are easy scapegoats, but they are not the ones driving this ultra-luxury boom, as they can’t afford those condos either.

  5. We are the only country in the world where a foreigner can buy U.S. property without being a citizen, a non-citizen resident, or even a green card holder. Every other country in the world gives preferential rights to its citizens. I don’t doubt this free access of capital to our housing markets have added to our housing stocks’ inflated values and have contributed to the homeless population.

  6. At least he tried. You don’t seem to understand that “bubbles” have been studied and described since the banking economy was implemented and is not a past 25 year artifact. The last few “bubbles” were dependent on social and transformational technology so how is that suppose to be historically modeled? How do you determine when a new internet event or a mobile technology event will happen. Historical bubbles like the tulip bulb, the French bubble, the roaring 20s bubble, the Japanese 80s bubble all have been studied. If you’re going to ask a snarky question expect a snarky response.

  7. A COUPLE OF SUGGESTIONS for low income, ‘affordable ‘ housing.
    ON SITE.
    These ‘affordable’ units shall be finished and ready for occupancy before any ‘market rate’ units can be sold or rented.
    Sufficient funds for completion of off-site ‘affordable’ units shall be deposited with the appropriate supervising/enforcement agencies before permits for ‘on-site’ permits are issued.
    Permits for off-site ‘affordable’ units shall be issued upon certifiable deposit of sufficient funds.
    Permits for on-site ‘market rate’ units shall not be issued until ground has been broken on off-site construction.
    ‘Market rate’ units shall not be rented or sold until off-site ‘affordable’ units are completed and ready for occupancy.
    OPT OUT.
    All funds shall be deposited in full with appropriate entity before any permits are issued.
    A formula shall be devised to require additional payments should ‘unforseen events’, market forces, etc occur.
    These funds shall not be diverted to any use (eg, rehabilitation of sub-standard housing) other than construction of ‘affordable’ housing.
    The controlling agencies shall expedite all processes to facilitate construction of these ‘affordable’ units, prioritizing those for ‘low income’, senior, disabled and veterans.
    Just my 2c.

  8. Great, this is all documented. Please document how the US current account deficit makes the San Francisco housing market unresponsive to the housing needs of folks who live here.

  9. Characterizing documented flows of international capital into US urban real estate is not bombast. Reacting to that as if it were bombast is a failed rhetorical effort at dismissing an inconvenient truth, given that US government policy encourages such conduct.

    Look at Willie Brown and the SF Bay Area Regional Center’s hedge fund:

    Nothing but channeling foreign capital to the Bay Area via special visa exemptions to Chinese *illionaires. Special visa exemptions to ensure that foreign capital can operate “high impact projects” such as condo developments in San Francisco.

  10. Gary, you may want to lay off the heavy thoughts about economic models; they don’t accentuate your strengths. Whenever you are tempted to think that traditional economic models don’t apply, just take a deep breath and say, “But they most likely do.”

  11. Yes. Progressives’ enthusiasm for blaming everyone else for a housing crisis they themselves have done much to create is quite a thing to see. The only thing more rich are all the half-baked theories of macroeconomics and global capital trends that often end up in tim’s articles.

  12. Tim touches an issue that I’ve been thinking about for awhile now. It seems that traditional economic models don’t really apply because for the last 25 years or so, our economic health has been based upon economic ‘bubbles.’ We seem to go from one bubble to the next. I would like to see that modeled.

    But our zeal to support these bubble industries/economies isn’t sustainable and there are high costs, economically and in human suffering, when we don’t have economically sustainable industries.

  13. Xenophobia and nativism are inherent in bombast focused on international capital. Declamations about same are not citizen participation, except in the fever dreams of the demagogue.

    Most of this is a just-so story: unverifiable and unfalsifiable. The rest is verifiable, falsifiable – and mostly false.

    Still, let’s hear it: how do capital flows make the housing market unresponsive to the housing needs of folks who live here?

  14. Whether 5,000 of 18,000 is “far too few” is a matter of debate, but no honest person would look at those figures and say 13,000 of 18,000 is “nearly all”. Tim was fudging, as he often does, and you’re moving the goalposts here.

  15. Tim lionizes Prop M (’86). But I’ve heard that once passed, and with the Wall St crash of ’87 and then the SnL debacle, that Prop Ms limits were never approached until more than 20 yrs later. So, the effect of Prop M was … squat.

    I would agree that this pace of market activity can’t last. But, Prop ‘Mission Moribundium’ will pass (emotional catharsis), and then an asteroid/tsunami/sun-spots will happen, the market will dissipate, jobs will be lost, and the Progs will declare another victory.

    Except funding for “affordable” will also wither, precious little ways to build $500k units to rent for an amortized $100k will be had; but the pressure will be off cuz fewer people will be pushed out (for now).

    Presto – No BUILDing: Mission Accomplished!

  16. That it makes you uncomfortable has no bearing on the mechanics of the finance sector that drives real estate speculation. For all intents and purposes, real estate is the only component of the FIRE economy that is, by definition, site specific. That means that the mortgage monster that shit the economy’s bed in 2008 has not been slain, that its maw is consuming our communities like some kind of vampire squid.

    The rules governing the flow of international capital have changed over the decades and now we are seeing international capital flows into real estate that are making the market unresponsive to the housing needs of folks who actually live here and are part of the local economy, not newcomers, folks who are already precarious.

    This city is all pluralities, folks from all over the world. The absurdity of equating citizen participation in land use planning processes with xenophobia and negativism is painfully evident. That you equate citizen participation in land use planning processes as socialist really diminishes any claims you might have had to grasping San Francisco’s political zeitgeist.

  17. Attacking xenophobia and nativism inherent in declamations about ‘international capital’ is an attack from the left, not right.

    The reason San Francisco should throw over the parochial center left and try aggressive social democracy is that, unlike parochial rent-seeking, social democracy works.

    What’s wrong with socialism, if not staffed by innumerate lackwits who confuse commercial real estate with residential?

  18. Tech, schmeck; I’m more concerned with the proliferation of eateries serving things like “trotters” than I am with a bunch of nerdy kids. The real villains in the piece are the real estate/banking/insurance industrial complex and the “Planning” Department. These unelected entities have far too much power over the quality of life in this town. And the current building frenzy is exactly what speculators, with the aid of the banksters, have always done: naked land grab.

  19. There are too few places to live, period. If we had hit targets, we would have had almost 13,000 more low- and moderate-income units, and that would have helped. Even hitting all targets still would have left a unit deficit of at least 20,000 units. That’s bad for everyone, with the possible exception of the absurdly rich.

    Fevered declamations about ‘international capital’ that ignore what goes right as well as wrong are part of the problem. Solutions will be scarce when all passion in the room is directed at invisible bogeymen.

  20. And money from India, Pakistan, Persia, Russia, Ukraine, Singapore, Japan, Korea, Australia, Canada, UK, Ireland, Scotland, France, Holland, Saudi Arabia, Qatar, Syria, Afghanistan, Iraq, Lebanon, Nigeria, South Africa…..

  21. Speak for yourself regarding other people’s intelligence, @Nancy Snyder . Tim said “nearly all” and @wcw:disqus said “not quite all” and pointed out that the number was about 66%, which is NOT “nearly all”.

    Some of us would like to have as much information as possible instead of baseless hyperbole. You obviously prefer the latter but you should show some respect for people who want to know as much as possible.

  22. Why do you think that bringing existing residents, citizens and voters to the table is the harbinger of socialism? This would not be so absurd were you not bending over backwards to defend corporate welfare and rent seeking.

    Welfare for the rich, free market discipline for everyone else!

  23. The critique here is from the left, not right: San Francisco should throw over the parochial center left and try aggressive social democracy.

    It’s hard to get to that analysis, though, in a world where two thirds is ‘nearly all’ and the simple incentive effects of a poorly designed fee structure on profit-seeking developers is ‘international capital’.

    Leaving aside thinly disguised, distasteful nativism and xenophobia, the sky is blue, two thirds is not all, and people respond to incentives.

  24. I thought your article & insights were excellent, Mr. Redmond. Two Q’s &/or for further: What is Lee going to run on if our economy isn’t as he pitches now & for his re election? And is it an opening for another candidate? #2 & if Lee thinks we’re doing so great from Tech, why do we need to pass another batch of bonds? VTY

  25. Remember the office space chicken littles from 2000, the Prop K and L battle royale?

    Had they blown through Prop M, the crash in the commercial real estate market in the mid 2000s would have been even more catastrophic.

    Even money that the rising clamor for more office space is a leading indicator of a crash.

  26. Capital writ large likes underwriting loans for construction and mortgages as well as insuring it all.

    How much more of our wealth do we need to burn on the altar of libertarian capitalism’s free markets before it starts to work for most people?

  27. please do not insult other people’s intelligence; despite the myriad of tables and graphs and charts, I am convinced that you do not want to try to understand what anyone else is attempting to state; and, yes, 5,000 moderate units out of 12,000 luxury high end is far too few – why carry the argument of the absurdly rich

  28. Nearly all of the new housing under construction is aimed at the luxury market.

    Not quite ‘all’; see Table Table I-64 of the 2014 Housing Element from Planning [PDF]. Of 18,000 units produced 2007-2014q1, 5,000 were low income and 1,000 moderate.

    That’s not because San Franciscans have a pent-up desire for high-end housing; it’s because that’s where international capital is going.

    12,000 above-moderate housing units might on a good day represent $8 billion in capital, which is a drop in the bucket. The GDP of California is over $2.2 trillion a year. ‘Capital’ writ large doesn’t care about investments totaling under $0.01 trillion.

    The reason that the above-moderate target got hit, while the moderate target didn’t, is that the city charges flat development fees. All it takes to develop the highest margin projects first is half a brain and the profit motive.

  29. I’ve heard prices are $1.4M for a 1BR in some of those developments. Not many tech workers make the $250K salary needed to afford that, only executives do. You need to look elsewhere, like banksters, lawyers, doctors, high-level city bureaucrats, Chinese plutocrats trying to sock away money away from the Communist Party and the like.

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