363 6th Street Site

As we first reported earlier this month, the 363 6th Street site which was approved for the development of 104 apartments last year is now on the market rather than having broken ground.

And as a plugged-in tipster notes, the adjacent 988 Harrison Street site, which was approved for the development of 100 units at the corner of Sixth and Harrison earlier this year, has quietly hit the market as well.

377 6th Street Site

Have we mentioned a Pricing Index for new construction in San Francisco, the year-over-years gains for which have collapsed from 20 percent seven months ago to zero today, and which has a number of developers counting on continued price appreciation for their projects to pencil a little concerned?

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Comments from “Plugged-In” Readers

  1. Posted by Dave

    Interesting. A portent?

    Developers have all kinds of data to crunch and they make projections about potential projects based on that.

    If a recession is coming which some think and if SF/Bay Area prices are going to go flat for a while (maybe decrease some) then some of these projects won’t pencil out. Until the next up-cycle.

    Wasn’t the approved SFH Sutro project put up for sale a few months ago by its developer?

    Could a stalling out in appreciation for condos impact One Oak and the other condo projects at Van Ness/Market? Keep in mind that the second tower of the Rincon Hill project was delayed 5 years or so because of the bad economy back then.

    [Editor’s Note: Huge Price Cut for Hillside Site Approved for 29 Luxury Homes (which remains on the market unsold).]

    • Posted by skyscraperluvr

      The market stalling for a few years is good news for getting even taller heights approved during those down years.

    • Posted by Orland

      Dave : re your inquiry about One Oak. .. maybe you need to expand your reading resources. Some timely, interesting info out there.

  2. Posted by BTinSF

    I really think we have passed the peak of this cycle and the Market/Van Ness cluster may have to wait for the next. There are plenty of signs of that but the glimmer coming off the tech unicorns is part of the picture and the flattening of real estate prices another. The failure to build approved projects is just more evidence.

  3. Posted by curmudgeon

    Of course development sites change hands all the time, but one way to lock in value is to get a property entitled and then sell the entitled property. Not as much upside, but much less risk (if it sells). Also, any property is available at a price….I’m not sure that quiet fishing expeditions are more popular in up or down markets. To me, though, the aggregate will be more telling. When enough developers delay starts that all those cranes start disappearing…..then we’ll really know the party is over!

    • Posted by SocketSite

      That’s very true and it helps to know who’s selling and whether or not the permits have been pulled. For example, based on the team that entitled the project, the listing of the 363 6th Street site didn’t come as too much of a surprise. We weren’t, however, expecting the 988 Harrison Street site to be flipped by Workshop1.

      • Posted by ralph

        Interesting – I’ve always got the impression that Workshop1 will flip it’s properties.

        • Posted by Kraus

          Re: Workshop 1. That’s exactly what they do; they haven’t actually built anything of any significant size themselves. They’re relatively new development players, likely with very limited capital — so they typically just get the project through the Planning-Approval process with the subsequent intention of selling/flipping entitled projects.

  4. Posted by Sierrajeff

    Having just been on Zumper looking at current rents, not only in SoMa but across the city, I find it hard to believe that developers are having trouble penciling out projects – even with the increased costs of building in San Francisco as compared to elsewhere.

    • Posted by anon

      Are you looking at asking rents or effective rents?

    • Posted by Dave

      Perhaps their numbers predict the rent increases will not be sustained?

      There is an upper limit to what even techies can and are willing to pay. In my neighborhood there are more than a few owners who rent out the large downstairs bedroom/bath to single tech workers. For a nice price – $1500/month. That is a lot more appealing than $3000/month. Plus its fairly easy to find parking.

      The reality is a single tech worker making 100K, just starting out, is going to have a huge tax bill and add to that 36K/year in rent. Like there isn’t much left to put aside in savings or what have you.

      • Posted by anon

        Expectations again!

        How much of your income can you pay in rent if you expect a multi-million $$ stock option payout? You can even follow your startup’s example and run a negative personal budget by taking money from the bank of mom & dad in the short term.

        But how much of your income can you spare if that payout isn’t coming and you need to save up for an emergency fund if the startup fails and for retirement in general?

        • Posted by The Milkshake of Despair

          I’ve been in plenty of startups and haven’t encountered any coworkers upping their lifestyle in anticipation of a stock payout. We were all well aware of the ~10% success rate that startups exhibit. If anything many lowered their lifestyle to brace for a few months without a paycheck if things went down the tube.

          Oh wait, in one startup we had a purchaser who drove a brand new Corvette that had a license plate frame reading “The one who dies with the most toys wins”.

          • Posted by anon

            But were you in the situation that many are in now? Where their unicorns are still private and thus most option holders have no liquidty but yet based on funding round valuations there is a large paper valuation? Even in the first dot com, you can google for stories of folks who did a 83(b) elections and got slammed on taxes for options windfalls that never materialized.

            And also remember that prices are set by the highest bidder. If you are conservative and don’t plan on any housing value gains, but others expect 10% YoY gains, you might be right, but who wins the bidding? Same for rent. If you want to lower your lifestyle to save up, but others don’t mind running at a loss, who gets the SF apartment in a hot market?

            Conservative investors may be right, but they aren’t the ones driving prices during bubble times.

            [Editor’s Note: Or more recently with respect to six-figure tax bills and near worthless stock: When a Unicorn Start-Up Stumbles, Its Employees Get Hurt.]

          • Posted by anon

            Great example editor.

            “Good’s final sale price down to $425 million, less than half of the company’s $1.1 billion private valuation…employees discovered their Good stock was valued at 44 cents a share, down from $4.32 a year earlier”

            Now intuitively you might think. “A nearly half a billion dollar sale isn’t quite a unicorn, but it’s better than nothing!” But see that this marked down the common stock that employees hold by 90%!

            And remember that options have a strike price, so employees don’t even get that 44 cents per share. So you get this situation:

            “For some employees, it meant that their shares were practically worthless. Even worse, they had paid taxes on the stock based on the higher value.”

            Now maybe some startup employees are sanguine about these types of things, but many are not.

            “Companies that buy employee shares offered some Good workers about $3 a share for their stock in the first half of the year. But based on their belief in the company’s robust health, the employees refused. Others bought Good common stock in August, when it was valued at $3.34 a share, according to individual employee tax documents reviewed by The New York Times. Employees had little idea that an outside appraisal firm had valued Good at $434 million and the common stock at about 88 cents a share as of June 30, according to investor documents and legal filings.”

            No employee chose to sell at $3 and in fact some bought in at $3.34 all the while the common was being appraised at 88 cents.

            Employees who early exercised or otherwise bought in at $3+ didn’t just miss out on option gains, they suffered a loss! Now in some cases, companies will loan employees the money so that they can perform a cashless early exercise. If you have 20k shares with at $3 strike price, you just sign a $60k promissory note to the company. If all goes well and the stock goes up, the company just gets paid back out of the proceeds when you later sell the stock post IPO. But what if things go poorly? In the worst case where the company goes into bankruptcy or goes to a distressed company investor to be stripped for parts, people actually get pursued for the value of these promissory notes. In a case like this where there’s an acquisition by an established company my experience is that the acquirer will forgive the debts. But the catch is that the IRS considers a debt forgiveness cancellation of debt income, so now you owe tax on that $60k even though you never saw a dime of it.

            Now again, this company is just one example. But look here:

            “In the case of an acquisition, all unicorns studied by Fenwick & West would have to see their valuations cut by 90 percent, on average, before investors would suffer a loss.”

            If early investors in *all* unicorns studied would need to see a 90% valuation hit before feeling any losses, who’s piece of the pie gets whittled down to make the early investors whole? Keep this in mind when you see these reports of mass markdowns of private tech company valuations. 6%-20% markdowns may not seem like much, but the effect on gains realized by employees can be a large multiple of the valuation hit.

  5. Posted by Mike

    All this happening just as Peskin and Kim are about to require 25% affordable for all future units. Will really put the brakes on new housing.

    • Posted by HousingWonk

      Which will then further constrict supply, causing more housing shortages, which will result in higher rents in those projects that do squeeze through making them pencil for the 25% BMR requirement! Its Fuzzy SF Math! Everyone wins!

      (Actually, nobody wins and we all lose. Except for incumbent homeowners whose property values increase and for so-called progressive activists who get the thumb their noses at ‘evil’ developers.

    • Posted by GhostWriter

      Mike your right. That’s exactly why Kim and Peskin are grandfathering projects in the pipeline so they can delay the visible impacts of the proposed Affordable Housing Legislation by a few years. They’re covering their asses while trying to play the role of hero. It’s a dangerous game.

      It’ll leave developers/investors fighting for the scraps (aka grandfathered projects with significantly lower affordability requirements). We’ll see if the buyers pick-up on this and if entitled projects continue to sell for a strong price even though the cycle might be shifting.

      • Posted by moto mayhem

        their ultimate goal is NO MORE HOUSING. its very clear and they think they are being clever about it

    • Posted by Sabbie

      We don’t need more housing, we need less speculation.

      • Posted by Kraus

        Restricting new housing — causes prices to increase — which then incentivizes “speculation” — in order to extract the maximum profit from the artificially-created shortage.

        So if you’re goal is to temper “speculation”, then you should definitely support the creation of as much housing as possible.

        • Posted by two beers

          This is backwards. Bubbles are always demand-driven, and not the result of supply constraints. Supply constraints can cause other issues, but not parabolic price increases.

          In a bubble, there isn’t an “artificially-created shortage;” instead, by definition, there is an artificially-created demand. You can’t build your way out of a bubble – it’s folly that deepens and prolongs the bubble. Bubbles only pop when the cheap funding that fuels the artificial demand dries up. Building into the bubble “incentivizes” the bubble.

          • Posted by Dave

            Artificially created demand – think the Dutch tulip mania several centuries ago.

            The current bubble was fueled by the Feds fiat money and their keeping interest rates near zero for years now. VC’s were awash with so much cheap money they could hardly find enough deals to pour it into.

          • Posted by anon

            “Bubbles are always demand-driven”

            I’d mostly agree with that. Though constrained supply adds to actual price increases which reinforces price expectations.

            But fundamentally, if you expect large price increases then demand explodes because who wouldn’t line up to buy a dollar bill for 20 cents?

          • Posted by two beers

            That’s right, Dave.

            anon- Building into a bubble is exactly what turns what might be a containable localized speculative phenomenon into a systemic risk. As people see supply blowing out, everyone wants to get in on the action, buying as many pieces as their credit line will support. At that point, you literally cannot create enough supply to meet the demand: the demand doesn’t end until the buyer’s credit line has reached its limit. That is how all bubbles end, as fewer buyers have sufficient credit remaining to keep demand going. Constraining the supply would actually curtail the bubble and limit system risk, but supply is always increased to meet bubble demand because there’s a lot of money to be made until the SHTF.

            Anyone curious about bubble cycles should be reading Minsky.

          • Posted by anona

            And when the bubble pops we have loads of cheaper housing. Not seeing the downside.

  6. Posted by medalist

    Well the bright side is these developers might well have the City to fall back on and overpay for their entitled projects as they did on 16th and S. Van Ness…

  7. Posted by Sabbie

    Rents have already come down, and new apartments are offering concessions (see The Civic and MB360). The tech IPO market is basically frozen, zero in 2016 so far. The median value of U.S. startups just plunged to $18.5 million after hitting a peak of $61.5 million in Q3 2015 T. Rowe just wrote down Evernote by 75%!

    Funding for startups fell 25% over the past quarter, the largest quarterly decline on record since the dot com bust 15 years ago. Meanwhile, they estimate completion of 5,000 new units in SF this year, compared to 2,500 last year. In summary, I’m guessing we’ll see plenty of development sites temporarily converted to tumbleweed farms and rat motels just like back in 2009.

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