Is San Francisco Real Estate Losing Steam?

The San Francisco apartment, hotel and office markets have been on fire since the Great Recession, but the most recent data from the region could be a sign of trouble ahead.

Here’s a look at what the new trend it could mean for investors.

Offices

According to Morgan Stanley analyst Vance Edelson, the slowdown in the tech IPO market could be to blame for relatively weak office vacancy rate numbers in the San Francisco area. Office absorption tends to closely track the IPO market, and Morgan Stanley has seen a slowdown in both in recent months.

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Edelson believes that investors should be cautious and choosy when it comes to office REITs with exposure to San Francisco, and names Columbia Property Trust Inc CXP, Paramount Group Inc PGRE and Boston Properties, Inc. BXP as its top picks.

Apartments

Edelson sees a bit more wiggle room when it comes to apartment REITs. “We think favorable supply/demand would persist even if the current approximately 145 thousand job growth [in 2016/2017] forecast were to be cut in half,” he explained.

Morgan Stanley’s top San Francisco apartment REITs are Essex Property Trust Inc ESS and Monogram Residential Trust Inc MORE.

Hotels

Not only has hotel revenue per available room (RevPAR) been on the decline recently in San Francisco, it has also been extremely volatile. In the past three months, San Francisco RevPAR has experienced 40-50 percent swings week-to-week.

Credit Suisse analyst Ian Weissman offered one simple solution for the swings: Several major events scheduled for San Francisco in coming months have switched calendar dates lately, which has a major impact on RevPAR.

Overall, Weissman believes San Francisco RevPAR will continue to come in above the rest of the nation's, but he believes the premium in coming years will decline from around 13 percent to the 6-8 percent range.

Top San Francisco-exposed hotel REITs include Ashford Hospitality Trust, Inc. AHT, DiamondRock Hospitality Company DRH and Starwood Hotels & Resorts Worldwide Inc HOT.

Disclosure: The author holds no position in the stocks mentioned.