Photo: Tom Gibbons

Back row (l-r): Mark McLaughlin, Stephen Patton, Sean Jeffries, Charlie Moore, Bryant McOmber, Mark Best, moderator Pamela Joyner, DJ Grubb; front row (l-r): Tim Murray, Dawn Ross, Nob Hill Gazette publisher Lois Lehrman, Patrick Barber, Nob Hill Gazette editor Chérie Turner.

Annual Power Brokers Pow-Wow

For the sixth year running, the Nob Hill Gazette gathered some of the best and brightest of the region’s real estate world to get an inside look at the market. Participants were especially eager to share and learn this year given the changing economic climate. 

Publisher Lois Lehrman hosted the occasion in the private dining room of the Four Seasons, as has become tradition. What resulted was the following honest, and realistically optimistic, look at area real estate. 

The lively conversation was moderated by investment expert (and highly active supporter of the arts), the beautiful Pamela Joyner. Participants around the table included: Patrick Barber (Sotheby’s), Mark Best (Coldwell Banker), DJ Grubb (Grubb & Co.), Sean Jeffries (Millennium Partners), Mark McLaughlin (Morgan Lane), Bryant McOmber (Pacific Union), Charlie Moore (McGuire), Tim Murray (Alain Pinel), Stephen Patton (Gomez & Patton), and Dawn Ross (TRI).

After a warm welcome from Lois, the panel got right down to the business of revealing clarity in these foggy times. 

Pamela Joyner: I travel all around the country and all around the world. Between New York and London, San Francisco feels like a garden party, from a real estate point of view. So the question I have is, if we look at this environment, the Bay Area, as ground zero for technological innovations, and you buy the notion that this stimulus package has some focus on stimulating innovation; what’s your prognosis about how that effects the real estate market? 

Patrick Barber: I’d say we’re very fortunate in San Francisco. When you look at what’s happened over the last few years across the U.S., I think New York and San Francisco were the last bastions, and with the financial crisis, I think they’re going to take it a lot worse in their high-end market than we are. Although a lot of our clients are in the financial industry, so we will not come out of this unscathed. But I think if you were to choose a market to be in as we go through this downturn, San Francisco is going to be a resilient, strong market because of the limited geography, talent pool, and because of all of the  opportunities. 

Charlie Moore: I might add directly, as to the stimulus package, I think that it is a mistake to lower the mortgage interest deduction on primary residences, and I do think it’s a mistake to raise capital gains tax. It directly affects those who are in the process of deciding whether they’re going to act or not. 

Mark Best: The mortgage deduction is huge. Everything positive that could come out of the stimulus package would be wiped out by that one sacrosanct element that we’ve all believed in and had for so many decades. I think that’s the fear factor in the local real estate market. 

Mark McLaughlin: Innovation and technology have certainly saved some good jobs for us. The lower interest rates, I don’t think, are going to have an impact on stimulating the housing market. If you don’t have confidence in your job, whether you’re getting debt at six-and-a-half or five percent doesn’t really matter. That’s what I think has taken the velocity out of the market, the security in jobs. 

Pamela Joyner: I jumped on MLS and perused the high-end listings in San Francisco, and there is almost zero supply. Are we lucky? Is that good news? What does that mean?

Dawn Ross: The people at the very high end who don’t have to sell aren’t selling. We are seeing a lot of inventory, especially at the upper echelons where people know that the sellers will sell, but they’re not motivated enough to put the property on the market openly. That being said, we had a recent experience where we had an almost nine million dollar house go in multiple offers, over asking, all cash, which means that there are at least three other qualified buyers in that eight to ten million dollar range who are just looking for the right properties. It seems like if you price a property well, you show that it has value in all ranges, there are people who are just waiting. They’re not going to overpay like they did in the past; they are going to wait until they consider a property to be a good purchase for them. 

Patrick Barber: I think your example is a good one. That property, the real estate community thought, “Wow, this is a unique and special property that will sell in the first week in a normal market.” It took three weeks, but all of the buyers were playing it very close to the chest, including one of ours who ended up not making an offer and is now kicking themselves. 

DJ Grubb: But the twist in the middle there is that a property, even if it’s priced at retail, only has a two to three week shelf life, and if you get past that period then you’re floating out there with the rest of the marketplace, and you could find yourself where there’s no action whatsoever. You hit your three weeks, you didn’t get a sale, and you find yourself in what I call the mid-market where you’re just sitting there. 

Charlie Moore: We’re in this painful process of finding our bottom. And our sellers are not ready to go there emotionally yet, because they’re still locked on to what they thought and what they continue to believe is the property’s value. It’s contributing to this stagnation.

Pamela Joyner: So maybe one theory in San Francisco is that there are not a lot of distressed or motivated sellers. There is enough affluence here to hang on
indefinitely. 

Bryant McOmber: I’m not sure I agree with the proposition that this is indefinite. Because I think that a lot of sellers who right now would be in the high-end category are going to be affected by the equity markets and other obligations, and they may find themselves moving over to the desperation side, and you’re going to see discounts. What I’d expect to see is a U-shaped recession, more than a V. There’s going to be a terrific determination by buyers and sellers, both to try to time the market, and determine where the bottom is. And that is always the problem, when [buyers] get back in the market when it’s half way up the other side. 

Mark McLaughlin: The sellers are hanging on hope, and the buyers are looking for opportunity. What we tell our clients at the high end that are sellers, is that I’d rather see them set the comps than have them used against them. If you price it right and there’s perceived value from the buy side, you’ll be out quickly. 

Mark Best: I think there’s a lot of denial out there. I’m saying the buyers think they’re in Stockton and the sellers think they’re in 2005. [Laughter around the table] So even the deals we’re putting together, there’s some fallout because there’s so much pressure with buyers thinking they should have waited. 

Tim Murray: I think appraisals are also an issue in some parts of the market. 

Bryant McOmber: I’m seeing some absolute irrationality in regard to appraisals. We had one deal where there had been two empirical appraisals and a few days later, someone at the same bank called and said, “We’ve evaluated the property at ten percent less.” No explanation. We asked if there was another appraisal, and no, they just determined its worth at ten percent less. They’re reacting to internal bottom lines and the pervasive concern over what’s going to happen in the next five years, but they’re drifting away from what they’ve done before, and that is accurate, dispassionate evaluation of properties. 

Pamela Joyner: So does that mean that that model is broken? 

Bryant McOmber: I don’t’ think it’s broken, I think they just threw it under the bus. 

Stephen Patton: I have some sympathy for appraisers because they are under tremendous pressure from the lenders to make sure they don’t get optimistic. Normally you can go back and look at comparable inventory six months; in this market, it’s a month and a half, two months. And we have this little thing going on between buyers and sellers, so you have less sales. And with less sales, you have far less for the appraisers to look at to help guide them. 

Patrick Barber: With September 15^th and Lehman Brothers [filing bankruptcy], on the high end, there have been so few sales. It’s difficult, today, to properly advise clients. 

Pamela Joyner: How is the South of Market area similar to or different from other parts of the high-end market in San Francisco? 

Dawn Ross: I think part of the problem is that there are numerous condos on the market for not many buyers. 

Patrick Barber: I think if you look at the St. Regis, the Four Seasons, these new benchmark buildings, they’re doing extremely well. I think if we had a three-bedroom in this building [Four Seasons], I’d bet everybody in this room has a client who would be writing an offer on it. So, I think we’re talking about general South of Market.

Tim Murray: Or not a Millennium. I think Sean [Jeffries] has a great product. What happens in this city is you create an address. And I think the Millennium has positioned itself extremely well. 

Sean Jeffries: Our experience, we opened the Four Seasons about twenty days after 9/11. At the time we were working with a lot of buyers who were under contract, trying to explain to them that the market had changed. It was a very difficult sell. It was a very difficult time. We took that experience into today’s world after September 15^th where we saw really no activity for three months. So we came up with a fifteen percent [discount]. 

Patrick Barber: Which was very well received. 

Charlie Moore: In a buyer’s mind, the South of Market corridor represents a lot of opportunity. I think what we have to avoid is the bottom-feeding mentality. And the question is, where is the bottom? There are marquis developments that I hope will be fine. And then there’s everything else. If there is going to be mercenary buying, it’d be in the South of Market
corridor. 

Pamela Joyner: Let’s talk about foreign buyers? 

Mark McLaughlin: We had about three last year, all over eight million dollars, but there aren’t thirty-three. The public has perceived that there are more like thirty-three, and that just isn’t the case. 

Sean Jeffries: We’ve seen almost none. Unless there are big discounts, there really is no interest from overseas. As soon as we reduced prices fifteen percent, we’ve seen quite a bit. The perception was, unless you are going to come to the table, America, and acknowledge that prices have changed, then we’re not interested in buying. 

Mark Best: When we think of foreign buyers we think of the wealthy family, and it’s going to be their fourth or fifth home. The anecdotal stories that I’m hearing are that, actually, the foreign buyers are buying at the bottom. Korean investors own hundreds of home in Sacramento, single-family homes. You go to Florida right now, Dade County, those areas, the supply of condominiums are all being bought by the Spanish, Portuguese, French. The Latin American investment in New York right now is huge. 

Pamela Joyner: One question that came up earlier is the pocket listing [homes that are available for sale but not officially listed] market and how prevalent that is. Does it create a shadow market in this environment? 

Mark McLaughlin: About twenty-five percent of the inventory in Marin county right now would be labeled as pocket listings. Generally speaking it’s overpriced, and that’s why it’s not on the MLS. They’re waiting for somebody to come to the high-water mark. The migration of those from a pocket listing to the MLS generally has a ten to fifteen percent discount from the pocket listing to the MLS. 

Dawn Ross: Pricing is very tricky in this market. There is no magic. We recently looked at, call it a six million dollar property, and there was almost a million-and-a-half dollar spread on where you could put it on the market. Sellers are hopeful but they are more and more realistic. They see nobody really knows what the price should be. 

Patrick Barber: We have so few data points from September 15^th to today, it’s very difficult. We’re not in a normal market. We’re advising clients, if you need to sell within a year or two, sell now because it’s probably going to get worse before it gets better. And, sure, you may be out fifteen or twenty percent in your mindset value. But, if you’re three-fold up and then down twenty-five percent, you’re still up. 

Charlie Moore: The science of pricing—there’s less science than ever. There’s less empirical data, and there’s less process, and there’s lots more art. What strikes me is, of course, everybody wants to get the most money for their assets. But they still have enormous capital gains; they’re seeing value that, in the long run, really doesn’t make that much difference after your capital gains tax. 

We’re a commodity like everything else, so for the past twelve years, maybe we’ve missed our adjustment cycle, and we’ve viewed real estate as infallible. In the long term, you’re going to be fine. What’s our expression? “When’s the best time to buy real estate? Five years ago.” It’s still the same thing: if you buy now and hold for five years, you’re going to be fine. 

Patrick Barber: You’ll be better than fine, because the interest rates will probably be ten or eleven percent. 

Dawn Ross: But you still have to convince sellers that pricing may seem counter-intuitive now, but it really does make sense. What’s happening is the higher the price that you put up, out of the realm of where it should sell, ultimately the less you end up getting. The closer you can get to the perceived value in the marketplace—understanding that that is difficult to do—but the closer you can get to that, the better and stronger the price you’re going to get. Otherwise you’re going to be chasing the curve, and right now the curve is headed downward. 

Charlie Moore: The buyers have to see perceived value, and when they do, they will act. 

Pamela Joyner: What’s happening to the community of real estate agents? Is there a shakeout like in so many other industries? 

Charlie Moore: Yes. When do you need the best council of your life? Right now. When do you need the best agent? Right now. In the former market, you could have listed it with your uncle, sister, and it might have sold. That’s not the case right now. Right now you need the expertise of an agent. 

Dawn Ross: Now more than ever, it’s important to not only pick a real professional, but to pick someone whose values you respect. If you pick somebody who has a commendable record, whom you do trust, and then you list with them, you’ll be well-positioned in the market. 

And with that, the 2009 roundtable concluded. Expressing the shared sentiments of the group, Charlie observes, “I knew this discussion would be interesting this year. For the last five years it’s been the same old thing. This is exhilarating.” Hugs and well-wishes capped the gathering with anticipation of how exhilarating next year’s event will be.