Shifts in Property Development
To some it may seem anomalous that property values in the South Bay district of San Francisco have emerged relatively unharmed after the global financial crisis, and indeed this is the case however, the San Jose district has also suffered from the lack of development funding. Residing in the most populous state in the United States, Californians breathed a sigh of relief when state funding for affordable housing programs was passed to address the housing shortage. Somewhat inevitably, affordable housing developers had previously enjoyed a consistent string of successful ventures, having endured to see market rate developers on the other side of the spectrum, over extend and enter into receivership.
Concomitant to the revenue reduction caused by soaring unemployment and lower asset prices, budget funding that was earmarked to support affordable housing programs has been directed to higher priorities in the precarious economic conditions that we find ourselves in today. Further, developers of affordable housing have invariably used income from the sale of tax credits to local businesses who, having no profits with which to offset these tax credits, are no longer in need of their acquisition in a considerably slower economy.
Ironically, many of the investors in these tax credits were banks who are now likely to be the last enterprises of all in need of taxable income solutions. Many banks have adopted such stringent lending policies that property developers in the South Bay have knocked on the door of previous financiers, only to find that the cupboard is bare.
The simultaneous stemming of state funding for affordable housing and also the lack of revenue from the sale of tax credits has posed a formidable challenge to developers pursing this niche market.
While many would view the current climate to promise great returns on affordable housing, numerous projects in the Santa Clara Valley have ceased progress and many development sites remain unattended at a standstill.
The housing shortage in the South Bay and its surrounds continues in the face of ever lower land values, low interest rates, and lower construction costs. Indeed the only increase in price appears to be the price of affordable housing, for it is still in high demand. It is within this conundrum that humble short sale may present itself to a prospective buyer. When a financial institution is owed far more than the current market price of property, it will diligently try to bring the prospect of recovering a portion of that loss into its investment management policies.
In this respect the short sale of partially completed affordable housing projects may offer the most lucrative returns on investment capital.
Interest rates and infrastructure have been used in recent times to stimulate the local economy however, the busy hub that is San Jose proves to be resilient to economic downturns as it places its progress in the safe hands of the technological specialization for which the South Bay is renowned. Given the lack of further participation by banks in this area of commercial lending, it seems that the gallant Union Bank may be the only lender willing to still offer hope to South Bay developers. Without them development of the area will remain stagnant until clearer proof of an economic recovery. Of all these, unemployment needs a reprieve from its sharp increase to over 9% in the South Bay to pre-crisis times when it remained at under 7 %.
It is for these reasons that a viable short sale in San Francisco’s South Bay, that has received the assent of the mortgagee, will represent one of the most important investments along the road to economic recovery.
