As Office Jobs Leave,
Will Home Prices Fall?

By DEAN STARKMAN
Special to RealEstateJournal.com

Looking for relief from the bleak fundamentals of the Northern California office market? Check out the Northern California housing market.

One of the more weird aspects of the collapsing commercial real-estate markets of the current down cycle has been the concurrent piping-hot demand and steadily rising prices of residential homes. The phenomenon is the yin and yang of the current real-estate market, if real-estate markets can have such things.

Remember, office vacancies deteriorated with unprecedented speed -- to 16% nationwide in the most recent quarter from 7.9% in December 2000, according to Reis Inc. -- while home vacancies in some markets are basically zero and prices have kept rising. Nowhere is the dichotomy more stark than in Marin County, Calif.

Recently, more than 1,000 people jammed a church in Novato, a Marin County town of about 45,000, to sign up for a random lottery for a chance to buy 351 affordable homes on the decommissioned three-square-mile Hamilton Air Force Base. In all, 2,600 people signed up for the drawing, which was the result of years of arduous negotiations between the U.S. military, local officials and Novato Community Partners LLC, a joint venture of the homebuilding arm of Centex Corp., Dallas, and closely held Shea Homes, of Walnut, Calif.

"It was quite a scene," says Novato Mayor Michael DiGiorgio, who is also a residential real-estate broker. "There was lots of happy screaming going on. And lots of disappointment."

What's more remarkable is Marin County home prices in recent years have escalated to the point that prices under the program range up to $330,000, for affordable homes.

And that's a heavily subsidized price, made possible in part by the federal government's sale to the program of a parcel for $8.3 million that could have had value of up to $50 million, according to Clark Blasdell, president and chief executive of NorthBay Family Homes, a Novato-based nonprofit group hired to ensure that income limits and other restrictions are met. For comparison, the market price of homes under the program will range from $600,000 to $800,000. No wonder people were screaming.

But then, in Marin County, a beautiful spot north of San Francisco over the Golden Gate Bridge, the cost of living is so high that the definition of low- to moderate-income under the program ranges from $33,000 to $136,000 a year.

What's striking about this worthy program is that the scarcity of housing in the area is in such marked contrast to the glut of commercial property. The vacancy rate for Class A office buildings in Marin County was a staggering 25.4% in the third quarter, according to Orion Partners Ltd., a real-estate services firm with offices in San Rafael, Calif. True, the county's market is tiny at 7 million square feet (which is smaller than New York's World Financial Center, the 8 million-square-foot office complex where this column is written). Still, the 20%-plus vacancy rate is all too familiar in the nine-county Northern California area.

And, as Mr. Blasdell points out, most of the region continues to suffer from an affordable-housing crunch in which average home prices have risen faster than average incomes.

A logical question stemming from this situation is how long the housing-price run-up can be sustained in an environment in which white-collar jobs are so scarce that Class A office buildings can sit vacant?

That's fair, but a larger issue centers on supply. Mr. Blasdell notes, with reason, that it's generally a lot easier to build commercial office buildings than it is to build homes -- hence the glut of one and the scarcity of the other. The reasons are complex, but certainly include the fact that local governments see office buildings as desirable generators of property-tax revenues, and homes as costly consumers of police, fire and trash services, and especially schools.

This issue is worth examining, particularly for those interested in finding ways to help the market efficiently allocate resources so that capital flows to meet what is obviously an acute demand and a reasonably priced home doesn't depend on the beneficence of, among others, the U.S. Air Force.