I recently reviewed a commercial real estate report from the first half of this year. Takeaway: Vacancy is steady at around 7 to 8 percent.
The report got me thinking about home prices and rental rates across the country and what the humble dollar gets you in different cities.
Check out all the Zillow data used in this piece on a Google Sheet.
Zillow has a whole data section of its website and publishes a Zillow Home Value Index (ZHVI), which is similar to the popular Case-Shiller index, a “smoothed, seasonally adjusted measure of the median estimated home value across a given region and housing type.” Zillow also publishes a Zillow Rent Index (ZRI), which is a “smoothed measure of the median estimated market rate rent across a given region and housing type.” One point to note: The Zillow Home Value Index is available for homes with different numbers of bedrooms, while the Zillow Rent Index is available only as an index of the entire rental market in an area, broken down by single-family, condo, co-op and the like.
Rent right now in San Francisco is 2.67 times that of Minneapolis.
The home value of a one-bedroom in San Francisco is about 4.92 times that of one in Minneapolis.
One key takeaway from all these data: The factor difference between rents in San Francisco and rents in Minneapolis is 2.67 times, but the difference in home values for one-bedroom homes (the ones that are easy to rent out) is 4.92 times.
Crunching the numbers another way, the revenue return on assets (not profits) for San Francisco rentals is about 5.94 percent, compared with about 10.94 percent in Minneapolis.
If you run a sovereign wealth fund looking to fund the construction of new apartments in the United States, the smart money will go to markets that look more like Minneapolis and less like San Francisco, even though San Francisco has a huge affordability crisis.
As you read about rent control proposals, property tax levies and the rising costs of construction, it all comes back to where investment will go. And it looks like San Francisco is simply too expensive to build in right now, or the rents are too low (what?) to justify new construction.