The National Association of Realtors analyzed existing home-sale figures for the past ten years, stretching from May 2008 to May 2018. Comparing the analytics

What’s likely to happen with commercial and residential real estate in the SF Bay Area over the next few years (as of May 2016)?

The Bay Area real estate market has been booming since 2012, thanks to strong demand and relatively contained supply. Demand has been supported by a particularly strong local tech economy, which created wealth and high paying jobs for people in the region. This growth attracted an influx of new residents, which put strains on the supply-restricted residential real estate market and raised prices further. Homes in San Francisco are now among the most expensive in the United States, coming in at an average of $946 / sqft, compared to the US average of $128 / sqft. As it stands, the housing market is reportedly in good health, and home prices are widely expected to grow over the course of the next year. However, these prices are contingent on employment, wages, and number of units available. With a number of signs pointing to a contraction in the technology sector, a staple of the Bay Area’s economy, housing price growth may not be as strong as current predictions suggest.

Real estate prices are determined by the supply and demand of housing units available. Demand can be measured, for the most part, by the size of the population in the area, the employment rate of that population, and the income of those employed. For the Bay Area real estate market, demand from Chinese investors has to be taken into consideration as well, but that’s a research project for another time. Suffice it to say that a drop in Chinese demand would negatively impact Bay Area housing prices, as well.

In recent years, a rising population, rising income, and falling unemployment (rising employment) rate have driven home prices skyward. However, you can see where past economic downturns have caused bumps in unemployment and population growth, and how home prices responded. After the dot-com bubble burst in 2000, the unemployment rate jumped and population growth dropped, then plateaued. Residential real estate price growth slowed, then briefly reversed before recovering. Unemployment jumped again after the housing bubble in 2008, and population dropped as well. Residential real estate prices fell for much of 2008 and 2009, and recovered momentarily in 2010 before falling again throughout 2011. The high growth in home prices we’ve been seeing lately started in 2012.

Supply, on the other hand, can be understood by looking at the number of homes on the market, and the number of new homes being constructed. I was only able to find data on the number of on-market units since 2010, but the contraction in number of units available in 2011 and 2012 coincides with the price per square foot picking up.

As for units completed, the housing crisis and the subsequent fall in real estate prices is clearly reflected in the drop in units completed in 2009 to 2010. This fall in unit completion is offset by about a year from the crisis because of construction time. While the number of units built in recent years has returned to, and likely surpassed, pre-housing crisis levels, it may have only recently reached the point that it has contributed to a fall in overall housing prices.

I don’t know that we’re in a bubble. I do think, however, that the San Francisco real estate sector isn’t growing at the same pace it has been since 2012. I think this slowdown in real estate may be related to a slowdown in San Francisco’s tech sector, which makes up about 13% of San Francisco’s private sector; over twice the US private sector makeup of 5.7%. A tech slowdown would have huge implications for the Bay Area’s residential real estate sector, as well as its commercial real estate sector, given that an estimated 80 to 85% of office demand in San Francisco is generated by tech companies.

To start with, the number of tech-related layoffs in the Bay Area, while still low, has increased over the last few years. In fact, layoffs so far in 2016 are more than double those in the same period from last year. Job growth, while positive, has slowed from previous years as well. It experienced a particularly sharp contraction in San Francisco’s technology industry, dropping from a 10.5% annual growth rate last January to a 5.1% rate this one.

This may be a result of tightening venture capital conditions, with a decreasing trend in the number of venture capital deals made as investors start to examine the mismatch between the valuation and profitability of venture-backed companies. While the amount of venture capital being invested does not seem to be decreasing, fewer companies have access to that capital. The number of Bay Area IPOs by has also slumped, from 35 in 2014 to to 26 in 2015. Half of those 26 companies exited 2015 with values below their initial price.

All of this is accompanied by a marked increase in the amount of subleased office space, an early indicator of past downturns, which has jumped 46% from the Q3 2015 to this past February. 41% of the subleased space on the market was put up due to companies contracting or consolidating, and 55% of that space was put up by tech companies.

I believe that, in reaction to these contractions, home price growth in San Francisco has dropped, hitting its lowest point in 4 years. March 2016 shows only a 1.3% price increase since March 2015. Compared to the 14.5% March-to-March increase the previous year, and the 18.7% increase the year before that, price increases have slowed drastically.

Another source reported that March 2016 was actually the first year-on-year decrease in house prices San Francisco had seen in 4 years, with a rate of -1.8%. Whether home prices in San Francisco have begun to stagnate or fall, it seems that the high growth rates we’ve been seeing since 2012 have come to an end.

Predictions for real estate performance in 2016 vary widely, though, with estimates ranging from 2.9% to 14% projected growth. The mean of the predictions I was able to find was 6.2%. This is rather close to the average 6.6% annual growth trend the San Francisco housing market has been experiencing since the 1940s.

Given the data we have on year-on-year housing price growth so far in 2016 (February’s 2.6% and March’s 1.3%), I think these estimates are a little too optimistic. Below is a chart of 2015’s and 2016’s price growth so far, with the current 2016 predictions on the right-hand side.

Over the next few years, if the current tech slowdown continues, both residential and commercial real estate prices in the San Francisco Bay Area will either stagnate or slightly decrease. If funding activity improves, or more tech companies prove their profitability, a pickup in wages and/or employment growth could boost real estate price growth, though likely at a lower level than 2012-2015. A substantial decrease in home prices is unlikely, given the magnitude of change in wages, employment, or housing units necessary to effect that change. For instance, according to Eric Fisher’s model, a price decrease of two thirds would require “a 53% increase in the housing supply (200,000 new units), or an 44% drop in CPI-adjusted salaries, or an 51% drop in employment”. So, I would posit that real estate in the San Francisco Bay Area will remain steady or slightly decrease over the next few years, with potential for higher growth if tech gains speed again, and a relatively low potential for catastrophic failure.