San Francisco's hot housing market could be showing signs of trouble.
In a note to clients on Friday, analysts at Morgan Stanley led by Vance Edelson wrote: "The tech IPO slowdown has stoked concern that San Fran, one of the hottest real estate markets, could be ready for a pause."
Specifically, Edelson and his team look at the commercial real-estate market, in which rents have risen about 70% since 2009 and demand has been robust - just 6.5% of the city's office space is vacant, a 10-year low - as the economy has bounced back and the tech sector has seen a fresh round of highly valued newcomers.
Edelson and his team write:
Robust demand since the Great Recession is being called into question, with a pick up in sub-leasing earlier this year, weakness in our AlphaWise survey earlier this week, and a tech IPO slowdown now in the spotlight. Office absorption indeed tracks the IPO market over time, although we see mitigating factors such as strong pre-leasing of new space, constraints on future development, and vacancy still close to historic lows.
The firm includes this chart, charting the number of tech IPOs against the commercial net absorption rate, which measures the difference between office space that is newly vacated and office space that is newly occupied.
Morgan Stanley
And so as the pace of new tech IPOs has slowed down, so has the uptake of companies moving into offices in San Francisco.
Overall, it's been a tough year for tech IPOs, particularly in the tech space, where over half the companies filing documents with the SEC to go public have disclosed a "material weakness."
And while disclosing a material weakness merely means its possible there could be problems with a company's financials - and could be seen not as a sign that companies are in worse financial shape but are merely being more realistic about their condition - this is certainly not an out-and-out positive sign for the market.
Additionally, Morgan Stanley notes in its report that this year, sub-leasing spiked to 1.4 million square feet of office space, or about 1.5% of the available stock, indicating that companies occupying huge amounts of office space were looking to supplement their leases by taking in smaller tenants.
The firm notes that around 330,000 square feet of this space was due to one financial services firm leaving for another states, but the remaining 1.1 or so million square feet of sub-leases included firms like Salesforce.com, Zillow, Zynga, and Jack Dorsey's mobile payments company Square, which just filed documents to go public.
As for the market facing problems with finding enough tenants to occupy future buildings, about 61% of the office space being built in San Francisco is pre-leased. But at around 7% of the current available office space, the amount of new space being built is considerable.
And so the firm expects the market to remain "fairly balanced," but the latest survey of brokers in city is pretty clear: the market is slowing down.
Morgan Stanley