Feature
by Jim Forbes
Member Rent Survey
Thank you all for submitting your average rental information online and through the form listed in this magazine. The results were somewhat interesting, if not predictable. For example, comparing the survey’s two-bedroom figure of $1,566 per month, it appears that the average rent in San Francisco is roughly 35% below market. About what the experts have been saying, although there were plenty of submissions at less than half the market rent.
It will be especially meaningful if we conduct this same survey annually. This way, we can get an idea of average turnover, and the effects of a flat market on rent-controlled apartments. I hope you are all up to the task.
Survey
Has anyone conducted a vacancy survey recently? I stopped doing them a few years back because the vacancy factor for everyone was to the right of the decimal point. It got boring. But times have changed. I can’t speak about the City as a whole, but downtown where I manage 185 units in three very representative buildings, 10% empty is where it’s at. It hasn’t felt this soft since 1995.
Naturally, part of the reason for high vacancies is asking prices from landlords—accustomed to the outrageous rents of 2000—have not come down fast enough to meet the slower demand. At the outset of the downturn last fall, our company quickly adjusted, realizing that $1,895 for a one bedroom and $1,295 for a studio were too high for decent, but unexceptional, units in the upper Tenderloin. Once we got to $1,495 and $1,095 respectively, we began to resist further adjustments, even as our vacancies started to pile up, and even though the new rents were still $200 per month higher than what we were getting at the beginning of 2000.
This summer, however, more drastic measures are required. We have rented out the first studio for less than $1,000 per month in nearly two years and are toying with free rent for others. I don’t know what I would do if all my vacancies were ready to rent. Fortunately, a bottleneck in apartment preparation and renovation keeps me from having too much inventory.
My quarterly rent survey of two bedrooms also indicates a steep softening since 2000, with $2,400 per month a new support level for the median advertised rent. This number is 20% off 2000’s high but also 15% higher than last year’s lowest figure.
San Jose, a competitor for jobs and housing is also finally starting to slip backwards. After seven straight years of positive rent increases, its median-priced, advertised, two-bedroom rent now stands at $1,525, a 7.5% drop from its high earlier in 2001 but still 33% greater than its high of 2000. If I could short these rents, I would.
If I calculate the drop in rent for my downtown one bedrooms and studios, the percentages are nearly identical to the two bedroom survey: One bedrooms are 21% off the high and 15% above the low, and studios are 19% below the high and 17% above the low. If I stretch the surveys back to 1998, the last year with a major pop in rents prior to 2000, market rents are still up an average of 7% per year for the last three years. It may not be enough growth for some of the high tech companies who employ our tenants, but I’ll take it in a New York minute for real estate.
Values Are Falling As Well
San Francisco apartments are special beasts, without question. When times are tough, they hold their value well, possibly dipping a percent or two in the bad neighborhoods but otherwise hanging tough. When times are good, they sometimes appreciate in a month over what other cities would be happy to get in a year.
In this last run-up in prices, however, we may have out done ourselves, especially in the building sizes most impacted by local government legislation.
For example, last summer I placed a three-unit occupied Victorian from the 1880s on the market and immediately got an offer for $810,000. After I found nothing to trade into, I decided not to sell and held onto it until this summer. Now the best offer I’ve had is $725,000, a 10% drop in value, equivalent to what the capital gains tax would have been had I just paid it. As we go to print, however, even that buyer just lost her job.
I wonder if bigger buildings are also being affected. I contemplated the sale of a larger downtown building that is currently rented at about 30% below new market numbers. In today’s world, it is worth 10 times the gross income. The last time rents were flat, these buildings sold no higher than 7.5 times gross—a major difference in value. Even if every low paying tenant in the building were to move, the value of the property would not increase. I guess I should sell.
I should go back to the uniqueness of San ;Francisco apartments. Comparing today’s value with that of the last recession is only valid for the next recession—and maybe not even the immediate next one. It does not take into account the next boom period that inevitable will occur, as it has some five times since the mid-1970s and who knows how many times before that? If one’s objective is long-term ownership and cash flow, it doesn’t matter that the sale’s value may fluctuate even by 30% or 40%. We all know that in the next growth period, San Francisco rents will once again outpace all others.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Jim Forbes is president of Urban Properties, a real estate investment and brokerage firm. He is a SFAA board member and the publisher of SF Property Report. He can be reached at 415-922-8998 or at his Web site at propnews.com. © Copyright 2001.