Bull market, China shop: Much of San Francisco is still owned by far-off investors. But if the real estate bubble pops, their loss could hit very close to home.
The old stereotype that San Francisco secretly harbors tons of empty apartments owned by wealthy out-of-towners hasn’t gotten a proper analysis in a few years. A 2014 study by the San Francisco Bay Area Planning and Urban Research Association pegged San Francisco’s vacancy rate at anywhere from a smallish 2.5 percent to a more alarming 8 percent, but admitted that this figure is “very difficult to exactly quantify.”
We do know that a lot of San Francisco’s housing stock is owned by affluent out-of-towners, some of whom are also outside the U.S. These international buyers’ proclivity for all-cash purchases above the asking price definitively affects the cost of housing and the city’s available housing supply. The question is by how much.
“There is a portion of our market that does sit empty after purchase because it’s somebody’s fourth or fifth residence,” says Mark Kelaidis, a license partner with the San Francisco office of real estate company Engel & Völkers. “If you cruise through Pacific Heights or the Marina District on any given day, there’s a good portion of all those properties that start at about $5 million that no one’s hanging out in.”
The National Association of Realtors (NAR) recently released its annual report on international purchases of U.S. residential properties. They found that last year, international buyers bought up less U.S. property nationwide, but more property in California.
“Ninety percent of all the [international] investment is … on one coast or the other,” Kelaidis tells SF Weekly. “It’s more appealing, it’s a better investment, appreciation is better.”
The NAR report ranks Chinese investors as the top outside international buyers of U.S. real estate, for the sixth year in a row. Chinese buyers spent more than $30 billion on U.S. properties last year, with Canadians in a distant second place at just over $10 billion.
Their most recent data also shows that Asian buyers make up an overwhelming 71 percent of internationals scooping up California residential property, though that total lumps emerging economies like India with more affluent nations like Japan under the broader category of “Asia.”
This is only one of the shortcomings that render this data a little imprecise. California deeds do not list buyers’ ethnicity or citizenship status, so these reports are just based on surveys of realtors.
But Kelaidis notes that the Bay Area’s sizable cohort of Asian buyers does not tend to let properties sit vacant.
“My personal experience with Asian clients is that they’ll stick a tenant in something — if a family member isn’t living in it — before they leave it sit empty,” he says. “They don’t get money out of China and buy million-dollar properties in San Francisco and not be pretty savvy about the whole business of it.”
While admitting San Francisco has vacant apartments whose owners live abroad, Kelaidis adds, “I don’t think that’s predominantly Asian. I think it’s everybody else.”
That “everybody else” shows signs of expanding. Engel & Völkers has more recent data than the NAR’s latest report which shows a slowdown in Chinese investment.
“There is a common assumption that the top purchaser or investor of U.S. real estate is Chinese,” says Kelaidis. “That’s been the case in 2016 and part of 2017. German investors were the top investor in the first half of 2018.”
Analysts point to China enacting tight, new restrictions on U.S. real estate investment in 2015, which the Bay Area market is now beginning to feel.
“China has made it difficult to move money out,” according to Kelaidis. “Germany doesn’t have the same problem.”
Further, the market is beginning to chill on fears of a coming recession.
“All investment and purchases slowed drastically, mid-third quarter ,” he says. “It felt more recessional, a lack of confidence in what’s going on in the world and the economy. It’s definitely a trend.”
Normally, a recession brings housing prices down and discourages wealthy outsiders from hoarding housing. But Chinese buyers have never been keen to let apartments sit vacantly. If they sell off their properties, whoever buys them may really pose an empty threat.