True or False: Rental Inventory in SOMA is up 100% in 12 months?

This post first appeared on Medium.

If you’re paying attention, you can feel it on nape of your neck: The winds of change are blowing through the crooked streets of San Francisco. Our tech boom is maybe, just maybe, collapsing under its own weight.

Recent headlines tell the story:

San Francisco’s luxury market cooling
Square’s IPO Targets could be bad omen for other highly valued unicorns
Condo inventory unexpectedly ticks up
Mint Plaza price cuts
Bill Gurley sees Silicon Valley on a dangerous path
Tech Startups feel an IPO chill
The dangers ahead if tech unicorns get gored

And now the data are starting to prove it out.

Apartments for rent in SOMA up 100%+ in 12 months

Apartments for rent in SOMA up 100%+ in 12 months

As a real estate investor, perhaps the most important part of my job is to evaluate market conditions and adjust our strategies accordingly. I’m one part amateur economist, one part evil speculator, one part detective and many parts educated guesser. And while the dangers of trying to use data from the past to predict the future are well-documented, smart number crunching mixed with experience and good intel from the trenches is the best way to anticipate trend shifts and turning points in cycles.

But over the years I have been massively frustrated by a lack of reasonably reliable real-time data on apartment inventory. Imagine trying to assess the interplay between supply and demand flying blind on half the equation.

Property sale data is easy to come by for pretty much all kinds of real estate. Listed inventory is a bit trickier to figure out but the data are there if you want to do the work. Meanwhile, rental demand can be approximated by triangulating employment, income and demographic data. But rental supply data? Doesn’t exist. At least not for the small and medium-sized buildings we own.

Until now. Thanks to a project I launched last summer which would not have been possible without the diligence and commitment of Stanford student Maya Theuer, I now have visibility into apartment supply trends in San Francisco. It’s like someone finally tore opened the blinds covering a window I stared longingly at each and every time.

Below are some initial insights as headlines and anecdotes stack up corroborating evidence from around San Francisco that indeed, the times they are a-changin’.

A word about the data. I am not an economist. I am not a statistician. This is not an academic study. I make no claims about the statistical significance of any of these data. The interpretations are my own. We collect and analyze daily inventory information from craigslist by neighborhood, doing our best to maintain consistency across the data set. Craigslist data is far from perfect, but my experience is that it’s consistently inconsistent and thus good enough to capture trends. Plus, it’s better than nothing.

Insight 1: Location, Location, Location

Some adages are true for a reason. And these data reinforce the oldest real estate cliché in the book. Supply in the Marina is down. The Mission saw a weird supply spike this summer. Inventory in Bayview has doubled since the spring. Why?

Each neighborhood in San Francisco has its own story to tell, and those stories underlie and are ultimately a lot more important than plots on a graph. Listen to the stories with an open mind and you can see changes in the market before they show up in the data.

More broadly, high rents in San Francisco are being driven by the booming technology sector. It’s really that simple, and attempts to explain away tech’s impact on the market are misleading at best. There are of course other factors that play a role, but neighborhood housing dynamics are so vastly different within the city (consider the cranes that dominate the downtown skyline while well-heeled residents of Telegraph Hill can block construction of a 3-unit building for years) that reading the tea leaves requires laser focus, block to block.

Insight 2: Supply Tells the Story

The Tenderloin is viewed by many as the last great housing opportunity in core San Francisco. Centrally located, transit rich and densely packed with large apartment buildings, investors and tenants alike are becoming more and more willing to tolerate the grime and grit that make the Tenderloin, the Tenderloin.

Supply has shot through the roof in recent months, as the graph above shows. Has demand really dropped off that much or are recently purchased buildings, newly vacated of long-term tenants, pushing blocks of apartments onto the market at the same time?

Digging into the data show a handful of double listings and other craigslist — specific anomalies, but even that’s telling. At the height of the rental frenzy in 2013, prospective tenants swarmed open houses. Marketing didn’t matter. What does it say that some of the city’s biggest landlords who have gone into the Tenderloin in size are now tricking the craiglist bots into allowing apartments to be listed multiple times?

Insight 3: Most of the city isn’t SOMA

Headlines rightly focus on SOMA, mid-market and the Mission as the epicenter of San Francisco’s tech boom. The effects are felt throughout the city, but data in most San Francisco neighborhoods show little more than a bump in supply thanks primarily to seasonal factors. Or no bump at all.

Inventory in the Haight is down year-over-year. There are fewer apartments in the Marina for rent now than there were 18 months ago. Even supply in booming Hayes Valley is only marginally higher than this time last year.

In other words, don’t look at city-wide data and assume the trend is mirrored across all neighborhoods.

Conclusion

The billion dollar question is simple: Has the tech boom run its course?

And if so, what happens next? How bad will it get? And how fast? What if companies that recently filled their coffers at lofty valuations can’t raise more money without risking a fate-sealing down round?

Tech optimists like to claim that this time is different because the companies are real, they make money. Which isn’t exactly true. Revenue doesn’t count as “making money,” and it remains to be seen if even the most successful startups can turn revenue into profit if the option of raising another round of funding is suddenly off the table.

Layoffs, or at the very least less hiring, will absolutely impact the rental market since landlords depend on well-paid young tech workers and employees in industries competing for the same talent to maintain sky-high rents. Property owners are not immune to herd behavior and once asking rents start to drop en mass, the race to the bottom is on.

Recent data indicate that rents are indeed slipping across the city, which mirrors my experience in the marketplace. I look at spiking inventory and wonder if after all these years, new construction is finally starting to ease pressure on rents. Perhaps. Or perhaps its just November.

After all, rents slipped throughout the first half of 2014 only to come roaring back this year.

Markets are apt to climb the so-called wall of worry longer than all but the most ardent skeptics think. And as John Maynard Keynes famously said, “Markets can remain irrational longer than you can remain solvent.”

“Experts” have been discounting the importance of the emotional elements of booms and busts for generations. But there’s a reason most individual investors buy high and sell low.

The data here is no doubt interesting, but ultimately is just an approximation of reality. In and of itself, they mean nothing. But data like this do crack open a window into the psychology of the people who make up the market and how confident they are in the future. And that’s what really matters.

Because when you start to question whether you’re actually making the world a better place, trading free artisan coffee and vegan lunches for time with your family starts to sound less and less appealing.