What do 1986, 2006 and 2016 have in common besides ending in the number 6? Each brought predictions that a San Francisco economic boom was ending.
Fears expressed in1986 were soon confirmed by the Savings & Loan meltdown and 1987 stock market crash. It took a decade for San Francisco’s economy to recover. Ironically, San Francisco voters finally passed highrise development restrictions in 1986 (Prop M)—just as the demand for new office towers ceased.
A small minority was calling the nation’s housing boom a housing “bubble” in 2006, and by 2008 their concerns were confirmed. The 2008 national economic collapse stopped housing construction for four years in San Francisco, and left the city’s economy stagnant until 2012.
Is 2016 the last gasp of a depleted San Francisco boom? At the risk of defying historical trends, I don’t think so.
Strong Economic Foundation
Unlike the booms preceding 1986 and 2006, San Francisco’s economy is built on a stronger foundation. And contrary to popular belief, that foundation is not a tech industry that some see as soon tottering but on a health care industry that continues to grow.
Those claiming that a tech “invasion” has wrecked San Francisco might be surprised to learn that of the city’s ten largest employers only Salesforce (#3) and Twitter (#10) are in tech. San Francisco’s economy is instead driven by the health care industry, with CPMC (#2), Kaiser Permanente (#4), and Dignity Health (#7) all in the top ten (figures are from January 1, 2016 San Francisco Business Times).
The only tech companies in the second ten biggest San Francisco employers are Uber (#14) and Yelp (#17).
San Francisco’s leading employer, Wells Fargo, joins other longtime businesses like PG&E, Gap, and Williams Sonoma in the top ten. All the talk about San Francisco’s economy being driven by financial shaky start ups makes good news copy but provides a misleading impression of the city’s economy.
The national policies of Ronald Reagan and George W. Bush created economies built on sand. Reagan’s 1981 tax cut created a real estate speculation frenzy that the 1986 Tax Reform measure brought down to earth. Years of stagnation followed. The same occurred after Bush’s Wall Street- generated housing bubble burst. In both cases the national economic crisis hurt San Francisco.
But today few outside the Republican presidential field see a national economic crisis around the corner. That’s a big difference from 1986 and 2006.
And San Francisco’s tourist economy is stronger than ever.
Solid Housing Demand
With rising interests rates and past history in their minds, San Francisco developers and real estate professionals are particularly worried about an impending downturn. Condo prices are rising slower than in prior years, and rents on vacant apartments may actually be lower in some cases than one year ago. Developers see a lot of new housing coming on line and see this greater supply as further reducing fall 2016 prices (many activists may not believe in supply and demand but most developers do).
Another sign of a potential downturn is developers’ coming into the San Francisco market lacking a track record. This parallels the entry of airline pilots and doctors into the real estate industry prior to the 1987 crash. When people enter a market seeking easy money, it often means that good times are about to end.
But the doom and gloom around the city’s housing market needs a reality check. Rents on vacant apartments are higher than their owners ever dreamed. This would remain true if there were no increase in such rents for at least the next three years.
While San Francisco’s job creation in 2016 and 2017 is unlikely to match its torrid pace of recent years, the number of people seeking to rent in the city still vastly outmatches the supply. That means rents on vacant units are unlikely to drop significantly from current levels. The landlords I know understand how good they have had it and always knew such steep rent hikes would not last.
I also understand that rising construction costs and Planning approval delays have left many developers worrying about the prices they will get for their units when built. But most will still get a better financial return than was projected when they bought the land.
For example, when I worked to preserve rent-controlled housing at the new Trinity Plaza happen at 8th and Market, Angelo Sangiacomo’s team hoped to get $1200 for a studio when the building opened. These units (now called Trinity Place) ended up starting at $1700. The smallest one bedroom now goes for over $2600.
So let’s keep perspective.
San Francisco’s economy will slow, and that’s a good thing. But the city is not repeating the days when a Wall Street crash and punctured national housing bubble put the San Francisco economy on the skids.
The biggest Bay Area economic question in 2016 involves Oakland. Will Oakland finally see ground broken on all the projects we keep reading about that are supposed to herald the city’s economic revitalization? Will those developers keep their faith in Oakland’s future despite talk of an imminent downturn? Or will they begin selling off entitled projects to cut potential losses?
We will soon see.
Randy Shaw is the Editor of Beyond Chron. He describes how the Tenderloin spent decades recovering from the 1986 economic downturn in his new book, The Tenderloin: Sex, Crime and Resistance in the Heart of San Francisco.Bay Area / California