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2013: The Year and Looking Ahead

2013 was unquestionably a record-setting, stellar year for San Francisco residential real estate. Citywide we enjoyed a complete recovery and exceeded all previous highs set at the end of 2007. 2013’s median sale price in single family houses was up 20.4% over 2012 and up 10.2% for condos/co-ops/TICs. Days on market plummeted over 34% as offer dates were set on most properties. Nearly 35% of all properties sold for over the list price, with the average sales price at 4.4% over list. We are experiencing extreme inventory shortages, and while Spring should bring new listings, the shortages will continue to fuel the exceptional Sellers’ market.

Nothing impacts our City’s residential real estate market more than the strength of the tech sector. We typically lag trends in the tech sector by nine months. IPO successes and employers moving to the City were key factors in 2013. Tech companies have leased 40% more office space since the start of 2010 than during the five year dot-com boom. The tech sector accounted for 86% of all new San Francisco office positions in 2013.

2013 also saw the rise of neighborhoods ideally located and socially positioned to serve the influx of tech professionals. Not just beloved Liberty Hill and Noe Valley, but now Mission Dolores, Dog Patch and Glen Park join the ranks of hot neighborhoods. Quality new construction in those neighborhoods is going for $1100 per square foot and up – exceeding what the traditional northside neighborhoods presently command for their vintage housing. Stellar condominium developments such as 200 Dolores and 3500 19th Street have set new highs. Only fully renovated view properties on the northside are topping the values of new residences in the best of the southern and eastern neighborhoods – some commanding $2,000 per square foot and up.

When will this come to a halt? Our real estate cycles have generally been seven years in length. The previous high was 2000-2001, then again in 2007-2008, leading me to predict that 2014-2015 may be the end of the current cycle baring no cataclysmic event. Economist Ken Rosen is more bullish and predicts that we have two, maybe even three more years of tech-driven growth in real estate.

While the northside neighborhoods (most notably Pacific Heights, Presidio Heights, Cow Hollow and Russian Hill) have historically held up best in market downturns, I predict that in the next downturn Liberty Hill and Noe Valley will for the first time no longer be hurt to a significantly greater degree than the northside. The newer emerging neighborhoods will be an entirely less upbeat story when this hot market cools.

Other trends from 2013 included:

• Fixers with expansion potential frequently sold for a higher price per square foot than homes in move-in condition.

• The premium paid for new construction widened. Superb boutique development projects such as John Willis’ Garage on Hyde in Russian Hill will pave the way for Trumark Urban’s upcoming luxury project at Webster & Sacramento in Pacific Heights. Troon Pacific’s outstanding LEED platinum certified single family house on Vallejo Street in Pacific Heights sold quickly at an undisclosed price based on a $23MM list price.

• Cash buyers dominated our market in 2013 at over 50% of all purchases, and their ability to close quickly continues to give them a strong edge over borrowers.

• Interest rates have begun to rise with the phasing out of the Fed’s quantitative easing and may go as high as 5.25% by the end of 2014. The cost of waiting for borrowers will be significant erosion of their buying power.

• For the first time, a major bank – Wells Fargo’s Private Mortgage Banking – offered fractional loans on a luxury TIC building (the luxury Park Lane on Nob Hill) and at rates nearly equal to traditional condo loans. This experiment by the leading team within Wells Fargo, if successful, could be a game changer in the TIC market. Park Lane units are selling between $2MM - $7MM.

Once again, this is a time when market savvy and experience make all the difference in the world. Experience and knowledge can pay dividends to sellers and lack thereof can put buyers out in the cold. Having the personal advice and dedication of a well-informed Realtor® will make all the difference.

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