October 2023 | VOL. 7

 

 

 

 

Huge news in the San Francisco development space; after nearly a decade of planning and approvals, Associate Capital started construction on a $2 billion redevelopment at the site of a former power plant near Pier 70. If constructed as currently approved, the Potrero Power Station project would see a 29-acre development consisting of several thousand new residential units, 1.6 million square feet of commercial space, and nearly 100,000 square feet of retail. The first apartment complex, which broke ground this month, will be an 85-foot tall building slated to include 105 residences for residents earning 80 percent of area median income and is expected to open in fall 2025.

 

 

 

 

 

 

This is one of three massive master plan development projects underway at San Francisco’s southeastern waterfront that will transform the area from largely former industrial sites that have been vacant for years into burgeoning mixed-use spaces.

 

 

The furthest along of the three is Mission Rock, a 28-acre development led by the San Francisco Giants and Tishman Speyer located at 3rd Street and Terry Francois Boulevard, which began construction in 2020. The new neighborhood will consist of 8 acres of parks and open space and approximately 1,200 new rental homes (40% of which will be affordable to low and middle income individuals and families), and will see the rehabilitation of historic Pier 48. The first apartment complex of Mission Rock--The Canyon--opened earlier this year. And perhaps the biggest feat of this development is that the entire neighborhood will be raised 66 inches to account for sea-level rise over the next century.

 

 

The third development, led by Brookfield Partners, will transform 28 acres of the larger 69-acre Pier 70 area of the Central Waterfront. Development of the site paused during the pandemic but has since resumed in full force. The site will consist of 6.5 acres of waterfront and upland parks, several thousand residential units with sea-level rise adaptation features, rehabilitation of historic sites, a 90,000 square feet arts facility and replacement studio space for Noonan Building Artists, and two childcare facilities.

 

 

There’s no doubt San Francisco is having a moment right now. But as companies work out hybrid / return to office policies and AI firms continue clamoring for office space, there’s no doubt in my mind San Francisco’s moment will pass like it has many times over the decades. And clearly some of the world’s biggest developers see a future here as well. I’m looking forward to how each of these developments progress and will be posting all about each of the new residences as they near completion.

 

 

 

 

On October 9, 2023, the Mortgage Bankers Association (MBA), National Association of REALTORS® (NAR), and National Association of Home Builders (NAHB) wrote to the Board of Governors of the Federal Reserve System (the Fed) to “convey profound concern shared among [their] collective memberships that ongoing market uncertainty about the Fed’s rate path is contributing to recent interest rate hikes and volatility.” Specifically, they claimed that the Fed’s wishy-washy statements about whether it intends to continue hiking short-term-borrowing rates has “exacerbated housing affordability and created additional disruptions for a real estate market that is already straining to adjust to a dramatic pullback in both mortgage origination and home sale volume.”

 

 

And they’re not wrong. Mortgage applications decreased 6.9% for the week ending October 13 compared to the week prior to the lowest levels seen since the mid 90s. The spread between 30-year mortgage rates and the 10-year Treasury yield are at historically high levels (more than 120 basis points above historical average). According to NAR, existing home sales fell 2.0% in September from August, reaching a seasonally adjusted annual rate of 3.96 million, down over 15% from September of last year. Since the Fed’s rate-hiking campaign began, we saw the biggest single year home sales crash (not price crash, sales crash) in history. And sales data may continue to tread downward as interest rates breached the 8% level, a number not seen in over two decades.

 

 

 

 

How has the housing market remained so resilient from a price standpoint amid these mind-boggling statistics? Simple supply and demand. Inventory still remains constrained as most sellers don’t want to list their homes if it means exchanging cheap fixed mortgages for more expensive ones. And since life goes on (people downsize, people upsize, people get married, people get divorced), there is ample demand to keep up with supply and prevent prices from crashing and burning. If the Fed does respond with a firm statement at its next meeting at the end of this month and beginning of next month, expect to see sharp moves downward across the board--mortgage rates, Treasury yields, and rate/yield spreads. When exactly that will happen and whether those moves are enough to re-ignite buyer and seller demand, no one can say for sure. But expectations are that late this year / early next year will start to see some softening and volatility to calm down.