Global Economies & the San Francisco Real Estate Market
Current events happening in different parts of world and in different markets are impacting our local economy here in San Francisco. Let’s take a look at some of the big ones: oil, Europe, China, United States and technology.
Oil is typically about $100 to $110 per barrel — that’s been pretty common for the past several years. In the past six months, it’s gone down to about $40 per barrel. That’s basically a crash in that particular market. Generally, it’s a great thing for consumers, it’s a great thing for us at the gas pumps, it’s a great thing in terms of the delivery and manufacture of goods — so for us as consumers it’s a huge tax break, but for the countries that are dependent upon oil for revenues it’s not such a great thing. When the markets are looking at all this, they’re looking where the growth in economies is worldwide, and those that are big oil producers aren’t doing so great.
Why does this matter? Well, it matters to Russia — a good portion of Russia’s economic activity is through petrochemicals. It matters to the Middle East. It matters to Canada. It matters to Mexico. It matters to Brazil. All of these economies are having some struggles now and going forward, and especially the Middle East. In the Middle East, 90% of Iran’s budget comes from oil revenues. For Iran to balance its budget, it needs to see $100 per barrel. With oil at $45 per barrel right now, they’re running a huge budget deficit and that probably is motivating them to sign this nuclear deal with the United States because they have about $140 Billion tied up in banks across the globe, but they — as an economy — as really in dire straits. Low oil prices seem to be here to stay. Some economists are saying the price could drop as low as $25 or $35 per barrel because we are seeing an oversupply versus demand. In Canada and even the United States now, we are producing more oil than we consume. Economies that are dependent upon this particular commodity might see some trouble going forward. Moving on…
Europe did some things very different than the United States did back in 2008 and 2009. As you might recall, back in 2008 we had the huge stimulus package which was very controversial at the time. It did create some very significant deficits, but it was the right thing to go into. We spent about $2-3 Trillion dollars on those types of projects, and we also had the Federal Reserve that had QE1, QE2, QE3 and they basically have bought assets in the market that total about $4.5 Trillion. Those two things that we did got the US economy jumpstarted and actually doing quite well. Conversely, Europe didn’t do that.
Europe instead took a path of austerity. Europe was worried about running deficits. It was worried about things that it shouldn’t have been worried about at that particular moment in time, so it didn’t go and flood the markets with capital. Consequently, its economies never really got going quite as well or as quickly as the United States’ did. Certain markets are doing better than others. Germany and England are doing better, but Europe as a whole isn’t doing so well. Where the markets are starting to be jittery now in Europe, that trend is not looking so positive. Europe’s GDP was running about 1% to 1.5% and it looked like it may be going in the right direction, but over the past several quarters now it’s starting to go the opposite direction — it’s starting to go down to 1% or less. But more importantly what they’re concerned about in Europe is deflation beginning to take hold. Our inflation rate is running about 1.5% to 2%, and Europe’s is actually negative for the past quarter and they’re expecting it to be negative this quarter. Now, Europe is waking up and taking aggressive measures of the same sort the United States did back in 2008 and 2009– they’re flooding the markets with capital, they have their own type of QE program, and we’ll see a lot of that type of activity now in Europe.
Another issue for Europe is the huge migration of immigrants from Syria and elsewhere in the Middle East. There is about 1.2 Million people in all — most going to Europe — that are looking for a home. Where are they going to live? Who is going to feed them? Those matters are going to weigh on the governments where these immigrants land and can add some very significant issues for Europe.
Moving on from oil and Europe, let’s talk about the real big issue here– the #2 largest economy in the world: China. China is the issue that most economists and investors are looking at very carefully. China may be going into a bubble. In fact, it is. This past summer, China’s stock market dropped about 40% in two months. You can imagine what that does to consumer psychology. The other piece to this is that the Chinese market — 98% of it — is owned by Chinese nationals. China doesn’t have the institutions that the United States does — it doesn’t have hedge funds, for example — that own most of the market. Instead, it’s owned by ordinary people like you and me. These Chinese nationals then begin to panic and sell their stocks, and this created a downward spiral in terms of its market.
In response to this, China did two things: 1) it ceased the trading of all small- and mid-cap stocks (about 60% of their market), and 2) it began buying assets over the past 2 to 3 weeks. While the Chinese economy has stabilized as a result, it’s somewhat of a false stabilization instead of letting the market go down and hit a bottom and be rebuilt. So there’s more to play out with the Chinese market — it doesn’t have the systems or institutions that we have in the United States, and the stock market collapse has changed the way people perceive China. We’re seeing a significant flight of capital from Asian consumers — the United States being a beneficiary of that. San Francisco and other US markets that the Chinese know are probably going to see more of that capital coming in the short term.
The other part of the bubble we’re seeing in China is its real estate market:
Oil is certainly some noise out there. Europe is some noise out there. China is the thing everyone is watching. What does that mean to the United States? Of the S&P 500, only 10% of those companies get a significant portion of their revenue from China. So the actual impact here may actually not be that great in terms of fiscal impact or jobs, but there’s a psychological impact that could occur and we’ll see where that goes.
Now to the good news!
In the United States, we’re doing really really well and headed in the right direction. Our inflation is very low — we’re running around 1.5% to 2%. Our GDP is on the upswing — this year we’re looking at about 2.5% GDP growth for the year following a slow (negative) first quarter of 2015 and a very healthy fourth quarter (projected around 3%). Some economists are saying we could see as high as 3.5% GDP growth next year. Unemployment: we’re at 5.1% — in most markets over the past couple decades that would be considered full employment. As mentioned earlier, low oil prices are a bonus to us here and will add some grease to our engine. Additionally, interest rates are remaining very low. The United States is experiencing very strong household formation — we have 1.5 Million new households and only 1.2 Million new homes being built, so supply is not meeting demand and that has us moving in the right direction as well; real estate will be a shining part of our economy going forward. 65 Million households in the US are making $100,000 per year or more — what’s even more interesting is that two thirds of those individuals are Generation X, Generation Y and Millennial. So there is now becoming a transfer of wealth from Baby Boomers to these younger populations. Lastly, nine of the top 10 companies in the world are US based. We have Apple, we have Google — all of the big companies are here.
The San Francisco Bay Area is the center of most of the United States’ growth. Two thirds of the jobs now in San Francisco are tech related. That’s a huge change from 10 or 20 years ago. We used to have textiles, we used to have Levi and Gap. We used to have Chevron here before it moved to the East Bay. We used to have banking — it’s still here, but not in the same way it was. Now, tech is the big driver of our economy here in San Francisco. It’s projected that the Bay Area’s population will grow by 30% by the year 2040. That’s about another million people — and where they’re going to go is a really good question. We’re seeing a lot of high-rise development here in San Francisco, a lot of infill development in some other markets. The venture capital put into the United States’ economy in 2015 is estimated at $45 Billion. Of that $45 Billion, $26 Billion is in California, and 46% of that is specifically here in San Francisco. Why is all of this happening here? It’s the culture of innovation.
When we’re talking about technology, there’s a misnomer that we’re talking about Silicon Valley. But Silicon Valley is really the Bay Area now. You have Google that has moved into Novato. Uber just bought the Sears building in Downtown Oakland. PeopleSoft, now Oracle, is also out in the East Bay in Contra Costa County. If GDP was measured just in the Bay Area, it would probably be 5.5% to 6%. Silicon Valley really is the Bay Area, and that’s certainly going to benefit our real estate market here in San Francisco.